Key Dates

Consultation paper issued on 6 November 2018.

Consultation period ends on 16 January 2019.

Summary

The DWP has issued a consultation paper on delivering collective defined contribution (CDC) pension schemes. The paper is intended to consider the DWP's broad proposals as to how a particular form of CDC scheme (as proposed by the Royal Mail for its employees) might work in the UK and the legislative and regulatory regime needed to support such a scheme. The paper recognises that the initial tranche of any other pooled risk schemes will need to operate within this framework. However, the DWP intends that the legislation may be amended by secondary legislation, so that the framework may be modified in light of experience or if employers come forward with different appropriate proposals.

Points to note about the proposals include the following.

Governance and scheme structure

• A CDC scheme must be an occupational trust-based pension schemed with its main place of administration in the UK.
• If a scheme providing CDC benefits also provides non-money purchase benefits, the non-money purchase section must be clearly separate from the CDC section.
• The initial framework will allow provision of CDC benefits by single or associated private sector employers. The framework may be extended later to include provision by non-associated employers or commercial providers.
• The DWP considers that current requirements for trustees to have knowledge and understanding (TKU) are sufficient for CDC schemes. However, the legislation will permit more stringent TKU and governance requirements to be imposed in future, should this be considered appropriate.
• CDC scheme rules must be clear on the triggers for winding up the scheme, and schemes must have a strategy explaining how the winding up process will work.

Authorisation of CDC schemes

• CDC schemes must be authorised by the Pensions Regulator before they can accept contributions.
• The DWP expects the CDC specific authorisation process to cover: whether those running the scheme are fit and proper; systems and processes; the scheme's continuity strategy; and financial sustainability.
• The authorisation process may need to consider other matters such as: member communications; investment, funding and increase arrangements; member options; and winding up provisions.
• The DWP is considering whether further requirements are needed such as: a CDC specific chair's statement; a requirement to report additional significant events; or CDC specific annual returns.

Actuarial valuations

• CDC schemes will be required to have a scheme actuary and to obtain annual actuarial valuations to determine whether benefit adjustments are needed. The annual valuations must be submitted to the Pensions Regulator.
• Schemes looking to provide CDC benefits will have to undertake a peer review of their actuarial assumptions before seeking authorisation by the Pensions Regulator. The peer review must be carried out by actuaries independent of the scheme actuary.
• The scheme actuary will need to submit the scheme's assumptions and calculations, plus its underlying investment strategy, to the Pensions Regulator as part of the authorisation process.
• The DWP prefers a best estimate model which does not include a capital "buffer" or "margin for prudence" as this could result in greater cross-generation subsidy.

Benefits

• The benefit level offered would be a target and would not be guaranteed by employers or members.
• CDC schemes should not be accrual-only or decumulation-only arrangements.
• Under the proposals being considered, contributions would be invested in a collective fund. Broadly, a member's pension would be calculated by:
• estimating the money needed to provide the target level of benefits to each member;
• comparing the total assets available with the estimated amount needed to provide target benefits for all members;
• adjusting current benefits being paid and prospective future benefits according to whether the assets exceed or are less than the amount needed to provide target benefits; and
• adjusting the future target level of benefits so that the total value of benefits equals the total asset value.
• The approach to adjusting benefits should be clear and unambiguous in the scheme rules as a mechanism, rather than as a trustee discretion.

Managing risk

• The DWP expects the design of a CDC scheme to be robust to changes in scenario, such as closure to accrual or a reduction in the inflow of new members.
• The annual actuarial process should consider emerging risks and threats. Where appropriate, the scheme actuary should consider whether to recommend that the scheme be discontinued on sustainability grounds.

Member communications and disclosure

• The DWP expects that most of the existing disclosure framework will apply to CDC schemes, including requirements applicable to money purchase schemes such as publishing information on a publically available website
• It is recognised that helping individuals to understand the nature of the arrangement, including that benefits in payment could reduce, will be a significant communication challenge.
• The approach to adjusting benefits should be communicated clearly to members.

Tax regime

• CDC schemes must be registered with HMRC and will be subject to the same tax regime as for other registered schemes.
• The government will consider whether further legislation is needed in relation to tax and CDC schemes, for example for the purposes of testing against a member's annual and lifetime allowances.

Auto-enrolment

• The DWP will consider what minimum quality requirements should apply to CDC schemes used for auto-enrolment purposes. It comments that a quality test which considers the scheme-wide cost of accrual may be more suitable than one based solely on the level of contributions.

Investment

• CDC schemes will be subject to the same investment requirements as other occupational pension schemes.
• The DWP expects that a fund used for CDC benefits will have to produce a statement of investment principles (SIP) modelled on that currently required for a money purchase default fund.

Member charges

• CDC benefits will be subject to the same charges cap as applies to other money purchase funds. The DWP comments that it expects that valuation-related costs incurred by CDC schemes may be defrayed across the scheme membership and assets.
• The charges cap will be applied across the whole of the scheme's CDC benefits, rather than at an individual member level.
• Where a CDC scheme is used for auto-enrolment, the permitted charging structures will be limited in the same way as for individual money purchase arrangements.

Transfers

• Members who have not yet drawn benefits will be able to transfer out of a CDC scheme. The DWP is considering whether the existing legislation on the calculation of money purchase transfer values will need adjusting, potentially by reference to the member's share of the total fund.
• CDC schemes may accept transfers in, with requirements to ensure that transferring members understand that no guarantees will attach to transferred in benefits.
• The DWP is considering allowing transfers in only where the member is accruing benefits in the receiving CDC scheme. It does not intend to permit decumulation-only CDC schemes, though it may consider this in future.

Legislation and next steps

• The DWP has concluded that existing legislation (including the Pension Schemes Act 2015 which provided for the introduction of defined ambition schemes) is not suitable for the adoption of CDC arrangements. It intends to introduce new primary and secondary legislation to Parliament as soon as Parliamentary time allows.
• CDC will be categorised in legislation as a type of money purchase benefit.

Date Accessed: 28/05/2022