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BeeHive  >  BeeLines  >  New amendment on hybrid schemes and the PPF

New amendment on hybrid schemes and the PPF

Now, hereís a fiddly one. Youíll remember from a BeeLine I wrote a couple of weeks ago that the Government types finally got off of the fence and published details of some of the annual levies that employers running final-salary schemes will be in for to support the new Pension Protection Fund. Well, (and thanks to the eagle-eyed BeeLiners who spotted it and wrote in), no sooner had the amendment been put up on the HMSO website (that's Her Majesty's Stationery Office) than it was taken off again. This was because there was a bit of a gaffe in the drafting that would have meant that hybrid schemes would have been caught with paying the annual levy for members who werenít Ďfinal-salaryí members.

If thatís as clear as mud, Iíll have a go at explaining.

The idea of the annual per-member levy is that all solvent employersí final-salary schemes will be effectively paying an insurance premium to support any final-salary schemes that wind-up in deficit in the case of future employer insolvency. So, all good schemes will be expected to pay an annual amount to a central fund to ensure that the few schemes that go bust donít leave people high and dry pension-wise. Thatís the idea anyway.

Itís only final-salary schemes that are covered by the Pension Protection Fund (PPF), as itís called, and so it is only final-salary schemes that are required to pay the levies. Thereís no point in people in money-purchase schemes paying for Ďinsuranceí they donít need. And thatís the gaffe in the drafting as far as Ďhybridí schemes are concerned. Hybrid schemes are part final-salary and part money-purchase and, if the rules are going to go pear-shaped anywhere, this is obviously going to be the most likely area.

A hybrid scheme is defined (in Section 307(4) of the Pensions Act 2004 if you must know) as being an occupational scheme

a) which is not a money-purchase scheme, but

b) where some of the benefits that may be provided are Ė

i) money-purchase benefits attributable to voluntary contributions of the members, or

ii) other money-purchase benefits.

The thing is some people can be members of hybrid schemes and only have money- purchase benefits. The problem with the original regulations was that for hybrid schemes there was no exclusion for those who were receiving money-purchase benefits only. The revised regulations now include a new regulation (regulation 17 no less) that says this:

Hybrid Schemes
17. The provisions of these regulations (apart from this regulation) apply in the case of any scheme that is a hybrid scheme (as defined in section 307 (4) of the 2004 Act) as if the scheme did not include any part of the scheme relating to money-purchase benefits.

Take it from me, the English translation of that means that people in hybrid schemes who are only in for money-purchase benefits wonít have the per-member levy applied.

This does illustrate, though, how difficult it is for the parliamentary scribes to get all these very awkward changes to regulation spot on at the first attempt. I think we can expect to see loads of similar mistakes as the year goes on and our entire pension rule book is re-written word by word.

Anyway, Iím going to have a lie down now before I read the new regulations on pension increases. Iím beginning to get really worried about my karma, by the way. I mean, there must be better ways of spending my timeÖ

Steve Bee
15 February 2005

This document is based on Scottish Life's current understanding of the draft regulations The Occupational Pension Schemes (Levies) Regulations 2005 and the Pensions Act 2004.