David Davison discusses the implications of the latest pensions announcement.
The continuing debate about when is a defined contribution pension scheme not a defined contribution pension scheme, affecting numerous charities in the Pension Trust Growth Plan, is set to continue following this weeks announcement that the government is considering relaxing the definition brought in as part of the Pensions Act 2011.
Rather than going back over all the history there's details in a previous article although I suspect most will now be very familiar with the problem. In simple terms the 2011 legislation meant that a scheme that was capable of having a deficit could not be classified as money purchase but would instead be classified as a defined benefit scheme.
The result of this in relation to Growth Plan was that a section of the scheme, Growth Plan 3, became reclassified as it had an underlying guarantee. This however was not the big issue as broadly the assets and liabilities of Growth Plan 3 matched, which meant there was little or no deficit.
The big problem was that under the terms of Growth Plan, Growth Plan 3 assets and liabilities needed to be combined with Growth Plan 1 and Growth Plan 2 which meant that Growth Plan 3 participants inherited a proportion of their liabilities.
That meant that effectively Growth Plan 3 liabilities were increased and Growth Plan 1and Growth Plan 2 were reduced. The impact on individual participants will therefore depend on the proportion of liabilities held across Growth Plan 1-3. The more GP3 liabilities the greater the negative impact with the greater positive impact on Growth Plan 1 and Growth Plan 2. If the legislation is reverted to the pre Pensions Act 2011 position then this will have the opposite result. The key issue however is that it will change the result.
The government are proposing, rather than change the legislation, to consult on a range of "exemptions" later in the year. The concerns about this are clearly that it will mean the current uncertainty persists for much longer and that any exemptions included are comprehensive enough to cover all the necessary issues.
The driver for the proposed change seems to be more around the potential negative impact of the legislation on Steve Webb's flagship policy, Defined Ambition, rather than the patently unfair impact of the regulatory change on existing schemes.
The proposed change would in my view put things right within Growth Plan. It seemed inconsistent and patently unfair that Growth Plan 3 employers are being forced to assume responsibility for a liability which belonged elsewhere. It does however mean that there will be an impact on everyone's figures which will undoubtedly increase the level of uncertainty and make decision making more difficult, though it must be said not impossible.
