DWP begins engagement over multi-employer CDC schemes – DC & Auto-enrolment

In his foreword, Opperman wrote that the new regulations “will be a huge step forward in providing a major enhancement to the existing occupational pensions landscape, and a third way forward between traditional defined benefit and post 2012 defined contribution schemes”. 

He continued: “By allowing pension scheme members to share investment and longevity risk, and by ensuring that employers have predictable pension costs, CDC schemes will mean members can be confident of an income in retirement that, while not guaranteed, will provide them with good value from the contributions they and their employer have made.”

He hailed the “great news” for Royal Mail, which is expected to provide the first CDC scheme in the UK, to be launched next year. 

Pensions Expert was told previously that initial uptake was likely to be limited given that the scope of the regulations was limited to the creation of single or connected employer schemes. 

While Opperman said that delivering these remained the DWP’s priority, he also noted that work had already begun on expanding CDC to multi-employer schemes.

“While our prime focus remains on ensuring CDC is available from next year for single or connected employer schemes, we have already begun engagement with interested parties to understand their proposals for multi-employer schemes and explore how CDC can best be used to help deliver good outcomes for more of tomorrow’s pensioners,” he wrote.

Clearing up uncertainty?

As Pensions Expert reported in September, the consultation attracted a mixed response when it was launched in July.

The Pensions and Lifetime Savings Association pointed out that the “loose” definition of CDC could be open to abuse, and would require a “careful and attentive authorisation review”.

“For example, some DB schemes have scheme rules that enable them to reduce benefits when the scheme is in deficit and an unscrupulous sponsoring employer may be tempted to do so by self-declaring their pension to be a collective money purchase scheme,” it said. 

“If the scheme was no longer receiving contributions, technically authorisation might not be required. Thus a ‘back door’ could be opened to avoidance of section 75, TPR moral hazard powers, and the reduction of member benefits without recourse.”

In its consultation response, the DWP said: “We plan on making transitional provisions when commencing Part 1 of the 2021 Act. These provisions will ensure that only schemes that are established after the [collective money purchase] provisions come into force can be characterised as CMP schemes. This will address this concern.”

The PLSA and the Society of Pension Professionals also raised concerns around the definition of “soundness” used in the consultation, which provides no indicators for when a CDC scheme might need to be wound up.

In its response, the DWP said that there was “no sensible way” to reduce “soundness” to a single definition, arguing that decisions on soundness will need to be made, and evidence, with respect to the standards set out in the regulations.

It did, however, make changes to these regulations “to help clarify the considerations and evidence expected of the scheme actuary and the trustees, and how this flows through to the matters to be considered by the regulator when satisfying itself the design of a scheme is sound”. 

“These changes are intended to draw a clearer line between each stage of determining soundness.”

Actuarial questions

The SPP had also argued that the draft regulations put to consultation were “asking too much” of actuaries, requiring them to “have regard to whether the scheme rules meet certain legislative requirements regarding the calculation of benefits”, which the society pointed out is “a legal matter” and the actuary “will have to rely on advice from the scheme’s lawyers”.

The DWP said it had considered the point, but that “on balance, we concluded we should retain the current drafting”. 

“We envisage that the scheme actuary may have regard to the advice provided to the scheme’s trustees on this matter or seek their own legal advice should they consider this to be warranted,” it said.

It added: “We do not intend to prescribe a ‘back stop’ setting out the specific circumstances in which a CMP scheme must be wound up.”

Another concern was that the regulations required actuaries to consider whether certain matters had been “accurately communicated” to members, with critics pointing out that member communications is a specialist area that is outside the usual realm of actuarial competence.

“In simple terms, we expect the scheme actuary to be satisfied that the actuarial advice being used to underpin key communications is properly used,” the DWP countered.

It added that it had amended the draft regulations “to help make this clearer”, but deferred several times — on this and other topics — to the Pensions Regulator’s forthcoming code of practice, which it said would provide more detail and context around the requirements.