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Government may move to save scheme pension

The Government has hinted that it may create an exemption to stop scheme pensions from being forced to comply with defined-benefit pensions legislation.

On Wednesday, Money Marketing revealed a DWP amendment to the Pensions Bill risked killing off the market for scheme pension by reclassifying the arrangements as defined benefits and forcing them to comply with DB funding regulations.

In response, the DWP says it has the ability to introduce new regulations to address any “adverse consequences” resulting from the legislation. Experts say this could take the form of an exemption from DB funding rules for scheme pension.

A DWP spokeswoman says: “The amendment to the Pensions Bill gives flexibility to make further regulations if necessary to avoid any adverse consequences. We have given ourselves some space to make further regulations should we need to.”

The amendment was designed to clarify the definition of a money-purchase scheme after a court ruled that some pension schemes can be classified as money-purchase even if deficits arise.

The DWP’s definition of a money-purchase scheme includes an annuity purchased with an insurance company or income drawdown. No exemption is provided for scheme pension, meaning they will become defined benefits.

Following news of the amendment, Sipp and SSAS provider trade body the Association of Member-directed Pension Schemes released a statement suggesting the impact would be small because current DB funding regulations only apply to occupational pension schemes and would exclude SSASs with less than 12 members.

Amps chairman Andrew Roberts says: “Whilst it would appear that scheme pension in a SSAS or a Sipp will be treated as defined-benefit for the purpose of the Pensions Act, that same legislation only applies to occupational pension schemes and includes exemptions for SSASs.”

However, Standard Life head of pensions policy John Lawson says the principle behind the Government amendment means that all Sipps and SSASs with scheme pension are likely to be hit, unless the Government creates a specific exclusion.

He says: “To say that Sipps and SSASs are not affected because there is no funding regime completely misses the point and is a total cop-out.

“There is no existing funding regime because they have been regarded as money-purchase benefits up until this amendment was made.

“Regardless of whether a rule-based, legislated funding regime exists or not, trustees have a fiduciary duty to pay the promised benefit to the scheme members and to manage the scheme assets such that they can meet that obligation.”

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. Anyone would think Standard Life SSAS/SIPPs are losing market share to those who can offer Scheme Pensions.

    Mr Lawson is rapidly finding himself standing alone on his soapbox preaching to an empty field.

  2. I have my pension with Pearl Group Staff Pension scheme. I have had a letter recently to offer the option of receiving a one-off increase to my current level of pension income by giving up the right to future increases that would be applied to part of my pension. This is currently known as a “pension increase exchange”. I would appreciate any opinion anybody has in this matter as independent financial advice is recommended.

  3. Nick White, Pensions Law Limited 31st October 2011 at 8:40 am

    Why does Standard Life find it so hard to get along with the other boys and girls in the SSAS and SIPP playground ?

    You don’t have to be an evangelist for “novel” forms of scheme pension to see that the relevant bit of the Pensions Bill is just DWP’s attempt to be helpful in light of recent court cases challenging the common perception of what “money purchase” means.

    The original MM article was scaremongering, and AMPS’ response is spot on.

  4. David Trenner - Intelligent Pensions 1st November 2011 at 6:50 am

    To John Lawson I say: If you have nothing useful to say, say nothing.

    To George Grant I say: The going rate for specialist pensions advice is about £225 per hour, and you can then rely on the advice given. You weren’t seriously expecting anyone to offer advice on a blog were you?

  5. Nick White,

    If you had bothered to read the judgement and the DWP narrative that accompanies the Bill amendments it ought to be obvious to you that far from attempting to be “helpful” the DWP is making these amendments to ensure that the UK is not in breach of the EU Insolvency and IORP Directives. Members of a pension scheme (Imperial Home Decor) were promised what they thought were guaranteed pensions and investment returns but the scheme did not have a funding regime in place to back those guarantees. As a result, the assets were deficient on winding up – i.e. the members didn’t get what they were promised. The DWP is making sure that doesn’t happen again.

    The Bill has now completed its parliamentary process and is awaiting Royal Assent. Legally, scheme pensions will become defined benefits within the next few days.

    As a lawyer, I am sure that advisers would appreciate your views on what this means for scheme pensions, and, in particular the funding of these pensions. Regardless of whether a specific funding regime exists for SSAS or personal pensions (why would one exist up until now for money purchase benefits?) the legal nature of the responsibilities that trustees have towards the scheme pensioner members of these schemes is about to change. What was prudent in relation to money purchase benefits may no longer be prudent in relation to defined benefits. Trustees cannot ignore their fiduciary duties just because there is no specified funding regime.

    The original article was not in my view ‘scaremongering’. Advisers have a right to know that the law is about to change and to start asking some hard questions about what that change in law means. Would you rather that advisers were kept in the dark with a “keep calm and carry on” message?

    Although DWP has the power to make exemptions, and has pointed this out, this does not mean they will use those powers. They also have the ability to either apply the existing funding regime to SIPP and SSAS or introduce a new more appropriate one based on holding solvency capital in recognition that sponsoring employers do not exist in most cases.

    The solution may not be available for another 9 months, but the change in law applies possibly from next week.

    Advisers should not ignore this change.

  6. Nick White, Pensions Law Limited 4th November 2011 at 3:10 pm

    John,

    Please can I correct 2 assumptions you are making:

    1) (in response to your suggestion “If you had bothered…..”) I have in fact “bothered” to read the judgement, the DWP factsheet explaining the Bill change etc.

    2) (in response to your question “why would [a statutory funding regime for SSAS and SIPP] exist up until now for money purchase benefits?”) it has always been possible for a SSAS to be “defined benefit” and indeed that is why DWP provided a specific exemption of SSAS from the statutory funding regime in the 2005 Scheme Funding Regs. If a SSAS could only ever be money purchase, there would have been no need for the exemption. In other words, it has consistently been DWP policy to exempt defined benefits SSAS from statutory funding requirements. The fact that more SSAS may now fall within the definition of “defined benefits” does not alter that.See s221(2) Pensions Act 2004 and Reg 17(1)(h) of the 2005 Scheme Funding Regs.Can you point to any DWP announcement that it intends to revoke the exemption in Reg 17(1)(h) ?

    As a lawyer acting for a large number of SSAS and SIPP operators, I will indeed be advising my clients on what this means for scheme pensions. I will be doing that in a constructive and co-ordinated way with AMPS and with other lawyers specialising in SSAS and SIPP work. I won’t be doing it by winding up Money Marketing and then calling the response by AMPS a “total cop-out”.

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