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Pension Schemes

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One needs only to see headlines dominated by pension topics to gain an understanding of their importance.

One of the more recent issues that has been tackled by both the Supreme Court and Parliament is in relation to the workplace pension schemes. There are two categories that a work pension scheme may fall into and identifying the right category can lead to different liabilities on the employer. It therefore comes as no surprise that a clear definition is needed, so as to prohibit companies escaping liability for an individual’s loss in pension.

Defined benefit scheme (DBS): This scheme creates a pension based on the individual’s salary and service, by taking into account the employee's final salary or career average earnings. The employers are responsible for making up any difference in the event of a deficit.

Defined contribution schemes (DCS): This scheme can be created through a variety of methods such as money purchase schemes or group personal pension plans but it essentially means that both employers and employees invest a certain amount of money. Upon retirement this investment is used to buy an annuity, this acts as the employees pension. The amount received from such a scheme is dependent on the amount contributed as well as how successful the investment was.

One of the main advantages for employers to select the DCS as opposed to the DBS is that if there is a deficit between the amount expected and the amount received they are not liable to make up the balance. This has led to some recent high profile cases in which employers have attempted to escape liability by classifying its pension scheme as a DCS.

One of the first cases occurred in 2005 (KPMG v Axon). In this case a pension deficit occurred and KPMG sought to escape liability by claiming the pension scheme was a DCS. The court, after assessing the pension scheme, rejected this argument and in doing so explained the legal definition of a DCS. The court stated that in order for a pension to be seen as a DCS the benefit of the pension must only be calculated by reference to contributions made (these being contributions by either the employer or employee). If the link between the contributions paid and the pension payable was broken, the pension scheme was a DBS. KPMG were obliged to make good the pension scheme's deficit. Good for the members of the pension scheme, not so good for KPMG.

However, in the case of Houldsworth and another v Bridge Trustees the Supreme Court seemed to depart from this view and stated that although KPMG was correctly decided a DCS could exist even if actuarial factors were taken into account to establish the payable pension. This resulted in the Court finding that the scheme in this case was a DCS and so the defendant Company was not liable for the deficit. Although this decision was welcomed by employers this was short lived as the Government expressed a concern that if a DCS could fall into deficit without an obligation on the employer to make up the deficit, members were potentially out of pocket without the ability to rely on the backup of the Pension Protection Fund.

The Government has therefore now issued retrospective (from at least the date of the Supreme Court ruling in the Houldsworth case) legislation "clarifying" that benefits cannot be regarded as money purchase benefits if it is possible for a funding deficit to arise in respect of any of those benefits. An amendment was made to the Pensions Act 2011 and the Supreme Court's decision was reversed.

This recent and rapid change by the Government is a welcome amendment to the courts ruling for employees and provides a much needs safety net for them. However, in turn such legislation has an adverse affect on employers who can find themselves being sucked into a regulatory nightmare of pension schemes.

For further information please contact Alexandra Dean of Gepp & Sons on 01245 228141 or deana@gepp.co.uk

This is not legal advice; it is intended to provide information of general interest about current legal issues.

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