The Government published draft CDC (collective defined contribution) pension scheme regulations and launched its consultation on these yesterday (19 July). The draft collective money purchase (as CDC is called in legislation) regulations follow the passing of the Pension Schemes Act in February. Once brought into force, single employers (or connected employers) will be able to open CDC schemes for their employees.
The foreword to the consultation by Guy Opperman, the Minister for Pensions and Financial Inclusion, stated “interest is growing day by day as the legislative framework for CDC benefits becomes clear, and many employers, pension providers and unions can see the advantages it can bring”.
The legislation was triggered by work carried out by Royal Mail and the Communication Workers’ Union (CWU) in 2018, resulting in the publication of an intended CDC design for Royal Mail’s workforce. The draft regulations reflect the work done with Royal Mail, which is now expected to be the first to open a CDC scheme in the UK. CDC provides members with a regular income in retirement (rather than a savings ‘pot’ as in a traditional defined contribution scheme), at a fixed cost for the employer and employees. Members, however, will bear the investment and longevity risks, through pension increases which vary depending on the scheme’s funding health.
The regulations’ focus is to provide protection for members of CDC schemes, to ensure that they have all of the required safeguards and feature a design which allocates the collective funds to determine member pensions in an appropriate way which is clearly communicated to members.
A CDC scheme will need to be authorised initially by the Pensions Regulator (TPR) in a similar vein to DC master trusts but with additional criteria to reflect CDC-specific features, and they will also need to comply with ongoing supervision requirements. Key to ensuring this will be an annual viability report which will assess the continued “soundness” of the scheme. DWP has developed two new tests specifically to cater for CDC schemes which are designed to ensure they provide value for money and that cross subsidies between members don’t become excessive. As expected, there is provision for benefit reductions which would have to be spread over no more than three years.
TPR is due to publish a CDC Code of Practice with more detail around the authorisation and supervision regime which will also be consulted on in due course. The authorisation criteria will include fit and proper persons, scheme design, financial sustainability, member communications, systems and processes and continuity strategy.
The consultation asks 20 questions across a number of areas of the CDC regulations. The consultation process will run for six weeks from 19 July to 31 August 2021. We would expect that the regulations could then be in place by around the end of this year, allowing Royal Mail to apply to TPR for authorisation for their scheme to open in 2022. The regulations will allow other single employers (or connected employers) to open CDC schemes which are similar in design to Royal Mail’s.
Guy Opperman describes these initial regulations as a first step and that this is a “job half done”. The next step will be to engage with the industry on designs for other types of CDC scheme such as non-connected multi-employer CDC schemes, CDC Master Trusts and decumulation only CDC schemes.
