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Dentons suspends scheme pension due to DB uncertainty

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Dentons has suspended the use of scheme pension on its Sipp and SSAS products due to uncertainty caused by the Government’s decision to reclassify the arrangements as defined-benefits.

In October, Money Marketing revealed an amendment to the Pensions Bill could kill off the market for scheme pension after the Department for Work and Pensions excluded the payments from its definition of a money-purchase scheme.

At the time, Sipp and SSAS industry trade body the Association of Member-directed Pension Schemes argued DB funding regulations mean SSASs with fewer than 12 members will be exempt. However, Standard Life warned that all Sipps and SSASs with scheme pension are likely to be hit and that the SSAS exemption was granted at the time when they were only providing money-purchase benefits.

Dentons previously offered scheme pension on its SSASs and Family Sipp products.

Dentons sales and marketing director Martin Tilley says: “We have temporarily suspended the use of scheme pension on our Sipp and SSAS products.

“We believe the impact of the Government’s decision to reclassify scheme pension as a defined-benefit is far from clear, and we felt that to suggest to new clients that they could go into scheme pension with any form of certainty would be wrong.

“It is unfortunate that this has happened at a time when interest in scheme pension is at a high due to the restrictions placed on capped drawdown income.”

Yesterday, Money Marketing revealed that James Hay had closed its Family Sipp to new business. The Sipp and SSAS provider insists the decision is not linked to the scheme pension issue.

Rowanmoor Pensions will continue to offer its Family Sipp product. However, the provider has been forced to link scheme pension increases for new business to the limited price index to comply with DB legislation.

Axa Wealth says it has no plans to pull its Family Sipp offering.

Head of pensions development Mike Morrison (pictured) says: “We are confident that the rules in the Pensions Bill will not impact on our Family Sipp because they only apply to occupational schemes.”

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Readers' comments (7)

  • Mike, your statement “...because they only apply to occupational schemes.”, is factually incorrect. The change in the law (Pension Schemes Act 1993 and Pensions Act 2008) that has already taken effect and is backdated, clearly applies to BOTH occupational pensions AND personal pensions. Why do you think different?

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  • John,

    I'm sure Mike is quite capable of defending himself, but as you know this is something I also take a keen interest in. Specifically:

    1) The change in the law (which I take as meaning the change to the definition of "money purchase benefits") has not yet taken effect. It requires a commencement order: see s38(4) Pensions Act 2011. I understand from speaking to DWP Policy section this morning that one is being drafted but that is as far as we've reached;

    2) Your own previous statements to the pensions press mention 2 ways in which the change in the law might have an adverse impact: imposition of the scheme funding requirement in Part 3 Pensions Act 2004 and a requirement for pension increases in payment under s51 Pensions Act 1995. Both requirements apply only to occupational schemes.

    For the benefit of other providers out there, can you confirm:
    - whether you agree that the change in the law is not yet in force;
    - whether the change in the law will have any meaningful effect on scheme pensions provided from personal pension schemes ?

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  • So, just to be clear Nick, you are saying that the change in definition does not apply to personal pensions?

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  • That's a disingenuous response by John. The change in definition applies to personal pension but the question is whether it has any real affect. So what are your answers to Nick's questions?

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  • John - I'm saying that the change in definition does not have any effect on personal pensions offering scheme pension. I don't know why you would choose to pick at the use of specific words in the article if there is no practical difference between "does not apply to" and "does not affect" and therefore no difference in the significance to readers of the article.

    Just to be clear, do you accept that:
    - contrary to your initial comment, the change in the law is not yet in force;
    - even once in force, it will have no material effect on scheme pensions provided from personal pension schemes ?

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  • Nick, I do accept that the commencement order has not yet been made and therefore the change in law is not yet in force.

    Your focus on the commencement issue detracts from the thrust of what I said initially that the statement made by Mike that this does not apply to PP was incorrect.

    As to your second point, I disagree with you entirely. It does have a material effect. The trustees of these schemes will be responsible for paying defined benefits rather than the money purchase benefits they pay today. The fact that there is no funding regime is not relevant in my view - trustees, even absent of a funding regime, need to have regard to their fiduciary duties.

    In future, trustees of DB scheme pensions (paid out of SIPPs) will need to consider whether it is prudent to allow part of the assets supporting the member's pension to be reallocated to other members. They will need to consider whether it is prudent to pay a pension at a much higher level than one based on expected, unless they have bullet proof evidence that life expectancy is shortened. They should also build in prudent reserves to cover the risk that the member lives longer than expected. Finally, they should avoid under-paying a pension - to fit within the lifetime allowance for example - they need to exercise their duties in a way that is fair and equitable to all beneficiaries.

    It would appear that Denton's also regard the impact of this redefinition of scheme pension as defined benefit as creating uncertainty. In my view they have done the responsible thing.

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  • John,

    Re the change not being in force, thank you for conceding that.

    Re whether there will be any material effect on SIPPs or other personal pensions, I think you misunderstand how the social security legislation interacts with the governing provisions of a scheme and the rights of scheme members.

    Changing the definition of money purchase benefits in the social security legislation doesn't actually alter the nature of the benefit promise made by a SIPP offering scheme pension to a member.

    There are lots of variations within the scheme pension products on the market, but to take a very crude example, a SIPP which promises "£x per year, provided that the rate may be reduced on future reviews" will still be promising the same thing once the new definition of money purchase benefits comes into force. The legal liability of the trustees to the member is unaltered. No risk of a funding deficit appears where none existed before.

    Nothing in the social security legislation applying to scheme pension from SIPPs does, or will, turn on whether the scheme pension is classified as money purchase or defined benefit.

    The bits of social security legislation that might cause problems for SSAS - scheme funding and increases in payment- don't apply to personal pension schemes.

    The only bit of the social security legislation I'm aware of that does (i) apply to personal pension schemes and (ii) turn on whether the benefits are money purchase or not, is s.10 Pension Schemes Act 1993, which specifies that a member's "protected rights" are his rights to money purchase benefits under the scheme. However, this should not be a problem for any SIPP operator who has heeded the advice of my own firm, and of other lawyers I know, that protected rights can't be applied to provide scheme pension anyway.

    The points you raise about allocating surplus, and about artificially inflating or depressing rates of pension, may well be valid but they are unaffected by the change to the social security legislation. They are really concerns to be addressed to HMRC to consider whether they are consistent with the tax legislation.

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