’Caught up as a consequence of changes aimed at bigger pensions’
A last-minute change to the Pensions Bill has created uncertainty for scheme pensions provided by SSASs and Sipps.
The Government took action after a Supreme Court ruling which found that “internal annuities” pensions provided directly from scheme funds were defined benefits.
The Government was concerned about this ruling because it has an obligation under two EU directives to ensure that schemes providing guaranteed retirement income from their own funds have sufficient assets to meet their technical provisions. In other words, these guarantees should be subject to appropriate solvency rules.
The bill amendments re-classify all scheme pensions as defined benefits. This change to the law applies both to occupational schemes and personal pensions and is likely to be passed without amendment when the bill becomes an act, probably in November.
SSAS and Sipp scheme pensions would appear to have been caught up as an unintended consequence of changes aimed at bigger occupational pension schemes.
And although SSASs and Sipps are currently exempt from solvency requirements, this exemption was granted at a time when they provided only money-purchase benefits.
Having now classified these benefits as defined benefits, the Government, if it is going to stick to its principles, should now make them subject to some form of solvency regime.
This might be the existing regime for bigger DB schemes (schemespecific funding, triennial valuations, PPF levies, etc) or, given that these schemes in many cases have no sponsoring employer, a new regime based upon holding solvency capital.
Alternatively, the Government might exempt these schemes from the new definition, meaning that they become money-purchase benefits once again. The Government has taken powers under the Pensions Bill to allow them to do this but such an exemption or a new solvency regime will take at least six months to execute.
Until then, trustees of these schemes must be made aware they are providing defined benefits rather than money-purchase benefits.
This should lead to a more prudent approach to scheme funding, even if no specific solvency regime applies. For example, reallocating one member’s “excess” fund to other members without a reciprocal obligation to make good the donor’s fund should he, for example, live longer than expected, could be regarded as a breach of the trustees’ fiduciary duty.
Until the Government clarifies this situation, trustees and scheme administrators of these schemes must exist in an uncertain purgatory.
John Lawson, Head of pensions policy, Standard Life
’The impact is not so worrying for providers within SSAS and Sipp’
The Pensions Bill before Parliament sets out to amend what is meant by money purchase with everything else being treated as defined benefit and those amendments make it clear that scheme pension is not treated as money purchase.
The money-purchase definition essentially includes the pension funds being built up by the application of contributions (as you would expect) plus annuitised pensions in payment resulting from such funds. It also includes income drawdown pensions in payment but does not include scheme pension, regardless of whether the scheme pension originated from a money-purchase pot or is subject to underlying fund performance.
This has created a concern that even scheme pensions arising from SSASs and Sipps will (retrospectively) be treated as defined benefit in nature and so such schemes would have to commence onerous and costly processes to comply with regulations.
The intention of such regulations, though, is to protect members of true defined-benefit plans where there is a promise of benefits, the size of which is not derived from the amount of money in the pension fund or on fund performance. Such protection extends only to members of occupational pension schemes (and so does not affect Sipp scheme pension) and furthermore there are exemptions from the regulations noted above for traditional SSASs, that is, those that have fewer than 12 members, have all members as trustees and require unanimous decision-making.
Scheme pension arrangements in SSASs and Sipps usually caveat that the pension is only promised subject to funding and not guaranteed. Furthermore, they are explicitly selected by individuals in retirement who choose scheme pension over annuity. Therefore, the authorities may rightfully be less concerned with scheme pension in SSASs and Sipps.
So the impact of all scheme pension benefits being treated as defined benefit in nature for the purpose of Pensions Act legislation does not seem so worrying for providers of scheme pension within SSAS or Sipp. Of course, there might be secondary aspects to consider such as potential legislative changes.
In the meantime, it is worth noting that the Finance Act 2004 uses its own definition of what is and is not defined benefit and these are not being amended. We therefore have the slightly odd situation that for the purpose of the Pensions Act 2004 (which deals with protection of member benefits) all scheme pensions are defined benefit but for the purpose of the Finance Act 2004 (which deals with taxation aspects), a scheme pension can either be defined benefit or money purchase in nature. Although this sounds odd, there is logic for this position.
Andrew Roberts, chairman, Association of Member Directed Pension Schemes