Schrödinger, Money Purchase and Defined Benefits Pension Schemes?

Greig McGuinness

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I was recently reviewing a set of accounts from a partly PPF bound scheme with both final salary and money purchase sections. Just to complicate matters the money purchase section was contracted out on a GMP basis prior to 6th April 1997 (i.e. it has a Defined Benefit underpin); oh and a couple of the money purchase members had their annuities purchased in the Trustees’ name when they retired. This all leads to some fun and games when you try to segregate the membership and assets.

It’s relatively straightforward if you stick with the terminology final salary and money purchase. A final salary member is always a final salary member and a money purchase member is always a money purchase member and therefore money purchase section assets, are always money purchase section assets but, is a defined contribution member always a defined contribution member?

So many people, myself included, at times use the terms final salary & defined benefit and money purchase & defined contribution as though they are interchangeable which is not always the case and can lead to confusion. Final salary pension schemes are the very definition of defined benefits however, although money purchase schemes tend to be defined contribution, this is not always the case. Up until the beginning of this century KPMG and the Pensions Trust had money purchase schemes where a specific contribution level would purchase a specific deferred pension, and there are a multitude of pure money purchase schemes that look like defined contribution but have a capital guarantee where your individual fund value is guaranteed to be no less that your contributions which makes it a defined benefit.

Does this really matter? Am I just being a pedant? The answers are yes and maybe a little.  A pension scheme that looks to be money purchase but has a defined element has all the governance requirements and risks of a final salary scheme; they need actuarial involvement (including triennial valuations), pay PPF risk based levies and have the same company accounts reporting requirements as final salary schemes.

In the particular scheme I was looking at we have the position where members have accrued benefits in the money purchase section on a defined contribution basis but when they retired the annuity was purchased in the Trustees’ name. So although the liability is completely matched by the investment, they are scheme pensioners with a defined benefit i.e. they are a pensioner of the money purchase section but also a defined benefit pensioner.

As for the GMP underpin members, this is where quantum theory comes in; the PPF will only recognise them as defined benefit members (at least for compensation purposes) if their fund values are insufficient to purchase annuities that will cover their GMP. Therefore as with the fabled cat you don’t know what they are until you do the test, until then (depending on your quantum school) they are either both DC and DB, or neither.

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