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High Court decision on what makes a DC pension throws up questions for employers

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The first Supreme Court judgment on pension schemes was handed down yesterday, clarifying confusion around what is a defined contribution (DC) scheme, which can have a big impact on members’ rights. ??

Yesterday the Supreme Court handed down judgment in Bridge Trustees Ltd vs Houldsworth and another.

This case deals with the meaning of 'money purchase benefits' in pensions law.

The Supreme Court decided two issues in the appeal. In particular, the Court ruled even where benefits were subject to a guarantee in the build-up phase, they should be considered to be 'money purchase' benefits; and where schemes used money purchase rights to provide pensions from the scheme itself, rather than to purchase annuities from an insurer, the pensions should be considered to be 'money purchase' pensions.

A statement from the Department for Work and Pensions read: "This is a complex and important decision, and we are considering the implications carefully. It is clear, however, that the judgment will result in some schemes being regarded as providing money purchase benefits under the current legislation, even if it is possible for funding deficits to arise in respect of those benefits. This will place some schemes outside the scope of a wide range of legislation, including that governing scheme funding, employer debt, the Pension Protection Fund and the Financial Assistance Scheme."

The decision has introduced uncertainty about how trustees of some schemes should distribute its assets if the scheme were to wind up. This increases the likelihood that they would need to seek directions from the Court.

The DWP statement continued: "The Government therefore intends to introduce legislation as soon as is practicable in order to provide certainty, and to ensure appropriate protection for scheme members' benefits, and compliance with our obligations under European law.

"Workers who hitherto thought their rights were protected have been put in doubt by a ruling of the Supreme Court. In the circumstances, the Government intends to ensure these rights are clarified through retrospective legislation.

"Our intention is that the legislation will have retrospective effect at least from the date of the judgment, and will make it clear that benefits cannot be regarded as money purchase benefits if it is possible for a funding deficit to arise in respect of any of those benefits. The Government will consider transitional protection in respect of events occurring between the date from which the legislation is effective and the date of this statement if, for example, this retrospective change would have adverse consequences for individuals.

"This will ensure that the legal definition of 'money purchase benefits' has the meaning that it has commonly been believed to hold. The Government considers that this course of action will better help ensure appropriate protection for pension scheme members."

Zoe Lynch, partner at Sacker & Partners, said: "The decision means there will be potential implications for organisational schemes following the judgement and individuals in hybrid schemes where there are currently elements of DC and DB could be affected as a result.

"The two benefits at issue in Bridge Trustees were a sort of hybrid benefits - not obviously DB or DC. They were a money purchase benefit with a guaranteed investment return and a pension benefit purchased in the scheme with a money purchase pot.

"The Supreme Court concluded that both these benefits could be categorised as DC. ??What now?

"The classification of the benefit makes a difference to the type of protection provided by legislation. For this reason, the Government intervened in the case - sponsoring the appeal first to the Court of Appeal and then on to the Supreme Court. In both cases a deficit can arise in the scheme as a result of the provision of these benefits, something that would be impossible if there was either no guarantee or if the annuity was purchased with an insurance company.

"The Government's view is that a money purchase benefit can have no mismatch between assets and liabilities, meaning it considered both these benefits to be DB in nature. But the Supreme Court disagreed.

"But this is not currently going to mean much as the Department for Work and Pensions have issued a statement (which is attached) saying that they intend to change the law to ensure that the disputed definitions in legislation read their preferred way.

"This means that the Supreme Court's conclusions that the benefits are DC are meaningless. The DWP plan to change the law retrospectively from "at least" the date of the judgment - possibly with some transitional provisions. It is unclear whether this will have adverse consequences on pension scheme members. The DWP's statement suggests that they will take measures to minimise any negative impact."