Growth Plan saga nears its end

17 Jul 2014 Voices

New clarity in the provisions of Growth Plan 3 means that charities in the scheme need to make sure they understand their position and the associated risks and costs, says David Davison.

New clarity in the provisions of Growth Plan 3 means that charities in the scheme need to make sure they understand their position and the associated risks and costs, says David Davison.

I’ve written historically on the uncertainty which has existed for hundreds of charities participating in the Pensions Trust Growth Plan but thankfully it appears that at long last we may be reaching an end point.

The Bridge case back in mid-2011 considered if benefits that were not solely based upon contributions could be classified as money purchase benefits and the judgment essentially concluded that they could be. This would mean that Growth Plan 3 (GP3), despite providing an underlying guarantee, would be classified as a money purchase scheme. All good to that point and therefore no change to how Growth Plan was being operated historically.

The DWP, who were party to the Bridge case, had sought a definitive statement that any benefit not solely based upon contributions, and could therefore give rise to a potential deficit, could not be defined as money purchase. Having failed to achieve this clarity, legislation was proposed as part of the Pensions Act 2011 (Section 29) which determined that any scheme which could give rise to a funding deficit could not be money purchase. While this legislation did not come into effect it confirmed that when it did its effect would be retrospective. This is where it started to get complicated!

Had GP3 been a standalone scheme this reclassification would have had a limited impact as broadly the assets and liabilities in the scheme matched ie it was fully funded. However, because of the umbrella nature of Growth Plan when GP3 became reclassified as a defined benefit scheme it needed to have its assets and liabilities merged with GP1 and GP2. This effectively meant that GP3 employers were being asked to cross-subsidise employers in GP1 and GP2 with the subsidy greater, the greater the proportion of GP3 liabilities held.

The Pensions Act legislation had a provision relating to “consequential or transitional provisions to avoid adverse consequences”. This simply meant the DWP wanted to know if there were inadvertent consequences resulting from the change. A consultation was therefore carried out to consider the impact. This left the Pensions Trust, in operating Growth Plan, in something of a state of limbo as it couldn’t be sure if GP3 was defined contribution or defined benefit which meant that each participating organisation needed to be provided with two deficit calculations, one including GP3 and one excluding.

Post the consultation on 6 May 2014 the DWP laid draft ‘Transitional Regulations’ before Parliament. These regulations effectively confirmed that after an ‘Appointed day’ set at 1 July 2014 effectively the Section 29 provisions would come in to effect i.e. GP3 would be defined as defined benefit and not money purchase. So that’s clear then……or is it?

At the end of June 2014 the Transitional Regulations were withdrawn and replaced by ‘new’ draft transitional regulations, the second part of which has just been issued in July. It appears however that the new regulations are effectively the same as the old regulations. So that’s good then!

So what does all this mean? Well it effectively means that what we thought originally was coming in, is in fact coming in, and that GP3 will become defined as a defined benefit scheme after 1 July 2014. This allows the Pensions Trust to understand the position definitively and therefore issue employers with their actual deficit calculation, so at least for employers there is some certainty.

Unfortunately however the inequitable position of GP3 employers remains and this is particularly the case for those whose liabilities are all GP3 and they’d understood these to be money purchase so therefore with no risk of a deficit. They effectively would have had a nil debt figure on the old ‘Bridge’ basis but now find themselves with, in some cases, a substantial debt having picked up debts from GP1 & GP2 employers. As well as losers, however, there are also going to be winners as part of this change, as clearly organisations which had predominantly GP1 and GP2 will now have a lower debt figure than would have been the case pre the change.

Now there is clarity organisations need to understand their specific position and have a clear understanding how they are going to manage their risks and costs.