This article was first published in substantially the same format on Lexis® PSL on 2 February 2022 and can be found here.
On 15 December 2021 the Department for Work and Pensions (DWP) published its response to last summer’s consultation on the Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2022 (Regulations) which establish the authorisation and supervision regime for a new type of UK occupational pension scheme, the collective money purchase (CMP) scheme. Chris Brown examines the consultation response and its implications.
Who should read this update?
CMPs provide a third occupational pension scheme structure which lies somewhere between traditional defined benefit (DB) and defined contribution (DC) schemes. This update will be of relevance to employers and advisers interested in learning more about the latest option and may be particularly attractive to those employers with a large workforce on relatively low incomes.
Background to the consultation
CMP schemes (or collective defined contribution (CDC) schemes as they were formerly known) have cross-party support having first been explored by the Labour government in 2008 and then becoming a defined ambition proposal of the coalition government in 2012. The legislative framework for CMPs was eventually implemented in the Pension Schemes Act 2021.
CMPs provide a third benefit structure which lies somewhere between traditional defined benefit (DB) and defined contribution (DC) schemes. While new in the UK, CMPs are widely used in other countries including Canada, Denmark and the Netherlands. Contributions are fixed and there is no guaranteed or fixed level of benefits. Instead CMPs ‘target’ an adequate level of index linked pension for life but this is an ambition and not a contractual promise. Benefits can be amended if circumstances, such as adverse economic conditions or increased life expectancy, occur. Even pensions in payment may be reduced.
They are essentially a sub-set of DC benefits with an extra level of guarantee and some sharing of investment and mortality risk among members. As such, they are subject to much of the DC regulatory regime including the requirement to produce an annual Chair’s statement, the forthcoming nudge to pensions guidance and will be subject to a charge cap.
However, unlike DC schemes, members do not have individual funds in which they choose the assets in which they invest. Instead, as in DB schemes, all employer and member contributions, and investment returns are pooled within a single fund meaning CMPs will be able to access more long-term and illiquid investments, potentially providing better investment returns.
What was the outcome? Have any changes been made?
The government in its consultation outcome: ‘The Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2021’ reported broad support from respondents for its proposed approach to regulating CMPs. Some minor technical changes have been made to the Regulations in light of the feedback received including, among others:
- a change to the definition of ‘connected employer’ to ensure it is consistent with the policy intent of ensuring that CMPs will only be available initially to single or connected employers
- confirmation that the application fee for authorisation of a CMP will be £77,000 (subject to certain exceptions). The Pensions Regulator (TPR) will provide more details in its forthcoming consultation on its Code of Practice on how it will calculate fees for schemes with more than one CMP section (the main exception)
- clarification of the tests and evidence to be provided by the scheme actuary and the trustees when preparing and submitting viability reports and viability certificates to allow TPR to assess the soundness of the scheme’s design
- confirmation that the government will not specify circumstances in which a CMP scheme must be wound up rather than closing to further accrual
- clarifications to the provisions relating to the valuation of scheme assets and the adjustment of benefits
- inclusion of provisions regarding how a CMP scheme may satisfy the auto-enrolment quality requirements for money purchase schemes under the Pensions Act 2008.
What are the implications for pension schemes, sponsoring employers and members?
The Regulations currently enable the launch of single or connected employer schemes only and facilitate the introduction of the CDC scheme that Royal Mail and the Communication Workers Union have been developing. Supporters of CMP schemes believe their introduction will result in a better retirement outcome for members compared to traditional DC arrangements.
Industry commentators have suggested that some larger retailers may also want to take a look at CMPs as they are particularly attractive where employers have a large workforce on relatively low incomes. Time will tell whether there will be widespread take up from employers, but CMP schemes will only succeed if there is confidence in this new type of provision. Ensuring that they are well designed and well run will be critical in developing that confidence.
What happens next?
Subject to Parliamentary approval, the Regulations will come into force on 1 August 2022. TPR launched the ‘Collective defined contribution (CDC) code consultation’ on its draft Code of Practice on 25 January 2022 which sets out TPR’s criteria for authorisation and the approach it will take when deciding whether authorisation should be granted to a prospective CMP scheme. Responses to the consultation are due by 22 March 2022. Further regulations making necessary consequential and miscellaneous changes will be published in February 2022.
Royal Mail is aiming to launch its CMP scheme this year, as soon as the Regulations are passed and TPR grants the scheme authorisation.
The Pension Schemes Act 2021 also contains powers to make regulations to enable the establishment of other forms of CMP schemes such as decumulation-only vehicles, commercial master trusts and industry-based multi-employer schemes. The government has confirmed that it is already speaking to interested parties to understand how CMPs could be expanded. Until that expansion occurs, CMPs are unlikely to have a significant impact on the UK occupational pensions landscape but they have the potential to dramatically change the way employees save for retirement and a new solution seeking to improve outcomes for members can only be a good thing.