Houldsworth and another v Bridge Trustees Limited and another and Secretary of State for Work and Pensions

A pension benefit is a money purchase benefit when its rate or amount is calculated by reference to payments made by or for the member. The statutory definition does not require the benefit to be calculated only by reference to those payments or to be their direct product.

A guaranteed or notional investment return determined by an objective formula does not break the necessary link with contributions. Nor does converting the accumulated sum into an internally provided annuity, since actuarial factors are necessarily used at that final stage. Equality between a scheme’s assets and liabilities is therefore characteristic of most money purchase arrangements, but is not a condition of the statutory definition.

The Imperial Home Décor Pension Scheme combined final salary benefits with Voluntary Investment Planning benefits and MoneyMatch benefits. MoneyMatch contributions were credited to a notional Guaranteed Interest Fund. Members received interest and possible bonuses determined under objective formulae. Both MoneyMatch and Voluntary Investment Planning benefits could be converted into annuities paid directly from the Scheme.

During the Scheme’s winding up, its trustee sought directions concerning the classification of those benefits. The deputy judge held that the disputed benefits were money purchase benefits. The Court of Appeal dismissed the Secretary of State’s appeal in [2010] EWCA Civ 179.

The Supreme Court had to decide whether the Guaranteed Interest Fund mechanism and internal annuitisation prevented the benefits from satisfying section 181(1) of the Pension Schemes Act 1993.

1. By a majority, the Secretary of State’s appeal was dismissed on the first and third issues. Lord Walker, with whom Lady Hale, Lord Collins and Lord Clarke agreed, held that MoneyMatch benefits remained money purchase benefits despite the Guaranteed Interest Fund mechanism. Voluntary Investment Planning and MoneyMatch benefits also remained money purchase benefits when converted into internally provided annuities. The second issue, concerning apportionment, did not arise.

2. Section 181(1) of the Pension Schemes Act 1993 requires benefits to be calculated by reference to payments made by or for the member. It does not say that benefits must be calculated only by reference to those payments or be their direct product. The definition contains no requirement to trace the exact investment return earned by each contribution. A scheme may therefore credit a fixed, guaranteed or notional return while retaining the statutory link between payments and benefits.

3. The Guaranteed Interest Fund credited a modest interest rate fixed by an objective external measure and allowed a limited bonus determined by another objective formula. The trustees had no discretion over those calculations. The mechanism did not detach members’ benefits from their contributions. It differed materially from the contingent and discretionary adjustment powers considered in Aon Trust Corporation v KPMG [2005] EWCA Civ 1004.

4. Internal annuitisation was compatible with money purchase benefits. Actuarial tables were employed only at retirement to convert the accumulated sum into a life annuity. The same actuarial process was unavoidable when an external insurer supplied the annuity. Treating the two methods differently would create insupportable anomalies.

5. Although assets and liabilities will ordinarily correspond in a money purchase arrangement, such equilibrium is not part of the statutory definition. Exceptional shortfalls may arise from an over-optimistic guaranteed return, high administration costs, misappropriation or insurer insolvency.

6. Lord Mance dissented. He considered that money purchase benefits required a direct investment link and matching assets. In his view, guaranteed returns and internally funded annuities exposed the Scheme to unmatched liabilities and should be treated as defined benefits.

1. United Kingdom Supreme Court: By a majority of four to one, dismissed the Secretary of State’s appeal on the first and third issues. The second issue did not arise: [2011] UKSC 42.

2. Court of Appeal: Dismissed the Secretary of State’s appeal and upheld the deputy judge’s classification of the disputed benefits as money purchase benefits: [2010] EWCA Civ 179.

3. High Court, Chancery Division: In Part 8 proceedings brought by the trustee, the deputy judge held that the Guaranteed Interest Fund mechanism and internal annuitisation did not prevent the disputed benefits from being money purchase benefits. A citation is not stated in the judgment.