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.”