Ruling on pensions

Defined benefit schemes, such as final salary schemes, pay a return based on salary and require the employer to bear the risk of the investment falling short. Defined contribution schemes, also called money purchase schemes, pay a return related to contributions made by employee and employer.

In Houldsworth v Bridge Trustees [2011] UKSC 42, the justices held that defined contribution schemes can include hybrid schemes where there is a guarantee on return, and where the scheme uses internal annuitisation to provide pensions from the scheme itself rather than to purchase annuities from an insurer.

Zoe Lynch, partner at Sacker & Partners, said the decision “clarifies confusion around what is a defined contribution scheme, which can have a big impact on members’ rights”.

The Department for Work and Pensions (DWP), which intervened in the case, said the decision would place some schemes outside the scope of existing legislation. It said it would introduce retrospective legislation to clarify that benefits cannot be regarded as money purchase benefits if it is possible for a funding deficit to arise.

Stephanie Hawthorne, editor of Pensions World, said: “This is a complex and important decision concerning the definition of money purchase benefits where the underlying legislation going back to the 1980s was poorly drafted.

“Money purchase benefits fall outside the reach of some pension scheme protection legislation including the Pension Protection Fund, employer debt provisions and the statutory priority order on winding up. Relatively few schemes will be affected by this decision as few schemes offer similar benefits to those in question but the DWP has responded to the ruling by announcing it will introduce retrospective changes to the legislation, so protecting scheme members.”

“There could be an amendment to the Pensions Bill currently going through parliament widening the scope of member protection.”