Purchase scheme not working as intended

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This was a ‘hybrid’ arrangement as it was possible for either of the above two points to lead to the scheme having a funding deficit. Based upon the definition in section 181 of the Pension Schemes Act 1993 the government believed that the members would be fully protected as the scheme would not fall into the category of a money purchase scheme. This was not how the high court interpreted the legislation in 2008. As a result the DWP took the case to the court of appeal and, following its judgement in 2010, subsequently appealed to the Supreme Court. The latter dismissed the DWP’s arguments on 27 July 2011.

It may be useful to take a brief look at the key aspects that the Supreme Court considered when arriving at a decision that perhaps went against common understanding of the legislation. The Supreme Court’s press summary of the judgement is useful here. One of the main reasons for the judgement concerned, as we would expect, the definition of money purchase schemes in the legislation. The court explained that “the statutory definition makes no express reference to investment return”. The court decided that “the equilibrium of assets and liabilities is not a requirement of the statutory definition of a money purchase scheme (and similarly for money purchase benefits)”. The judgement also considered internal annuities, as opposed to the purchase of annuities from a life office, and found these not to be incompatible with money purchase benefits. The court of appeal had earlier pointed out that both methods were very similar as both used annuity tables based on actuarial calculations when the member retires to convert a lump-sum into an annuity. The deputy judge said that “the distinction would produce insupportable anomalies”.

The DWP was unhappy with the judgement as it meant that schemes with similar benefits would be classified as money purchase schemes even though the benefit structure could lead to them being underfunded. As a result the scheme would not be subject to the statutory funding regime and members’ benefits would not be protected by the Pensions Protection Fund in the event of insolvency. The government announced, on the same day as the judgement, that it would amend the legislation to make certain the position and thereby negate the judgement. Retrospective amendments, effective from 1 January 1997, were made in section 29 of the Pensions Bill 2011 but the implementation of the changes was left to be introduced at a later date since the government wished to enact transitional arrangements to prevent unintended consequences of backdating the change.