— Josephine Cumbo (@JosephineCumbo) July 21, 2020
CDC is CDC (but also CMP)
In another step forward, the Government announced yesterday that CDC Schemes will be able to operate with HMRC approval from April 2021.
During the time CDC legislation has been in the making Collective Defined Contribution has become Collective Money Purchase but few if any of us will know it as CMP, not least for the confusion it will bring to the elderly pension aficionado to the COMPS and CIMPS of the late 20th century.
This is a pleasing example of the Treasury and DWP working together, the Pensions Schemes Bill is likely to gain Royal Assent in the next parliamentary session but has still to be debated for another time in the House of Commons. From this announcement, it looks as if the Treasury sees (at least for the first part of the bill relating to CDC) that the legislation is as good as written. This will be please friends of CDC, it certainly pleases me. It will certainly please Royal Mail and I hope that regular readers of this blog will see what a boon CDC could become to those looking to convert pension pots into retirement plans.
CDC’s place “on the employer’s spectrum of choice”
The HMRC clearly see CDC as an alternative to providing members with future DB accrual, this is from the impact statement of the announcement.
This measure ensures the new collective money purchase pension scheme can operate as a UK registered pension scheme and could impact individuals who are currently members of employer-sponsored defined benefit pension schemes, if their employer wants to change their pension scheme to the new type of scheme.
The new scheme will be operating as a UK registered pension scheme so there will not be any additional impacts on the individual. The individual will still receive tax relief on member and employer contributions and can continue to receive payments from the scheme. The individual will continue to have access to authorised payments, as well as the annual and lifetime tax-relieved savings limits.
This accords with a recent public statement from the Pensions Minister in which he placed CDC on a spectrum of choices available to employers offering staff a workplace pension. It is interesting (and perhaps sinister) that the Treasury see CDC as impacting on the members of employer sponsored defined benefit schemes.
CDC’s place as an investment pathway?
But in private conversation with the Minister and his aides , my attention was drawn to section 47 of the proposed CDC regulations in the Pensions Schemes Bill. In this section there are provisions for schemes to operate in part as a CDC scheme (have a CDC section) and for multi-employer schemes (master trusts) to move to CDC either as a whole or in part.
It is generally thought that the growth in CDC plans will be not just as a means of building up future pension benefits (as will happen at Royal Mail) but as a means of converting existing DC benefits – as an alternative to buying an annuity or to drawdown.
If the FCA’s investment pathways turn out the way for us how to use our pension freedoms, the future of CDC as an alternative to the current options looks limited. But all the evidence suggests that what people want is both choice and a default if they cannot make a choice.
If people have difficulty choosing between the four investment pathways currently on offer, it may be that CDC may – within multi-employer schemes in particular, become the default investment pathway. This is the gift of section 47
For those who like to see their legislation in the draw, I include section 47 of the pension Schemes Bill as it currently stands in the appendix to this blog.
Target pensions not defined benefits
CDC presents a cultural shift in pensions away from the guarantees on defined benefits that have dominated funding debates between sponsors , regulators and trustees these past 25 years. The shift is back to the period before the imposition of mark to market valuations when pensions were offered on a best endeavours basis with the amount of pension being linked to the successful endeavours of those running the scheme.
This is of course how defined contribution schemes work, and CDC is a type of DC, not a replacement DB. But it differs from conventional DC in offering a target pension based on the assumptions made by the scheme of what the scheme can reasonably expect to offer. This “best endeavours” approach is not for everyone and employers and savers can choose to have nothing to do with it.
My view is that this cultural shift towards collective pensions offered on a “we’ll do our best basis” is the way forward for many whose retirement income options currently present too hard a choice.
Appendix- Section 47 of the Pensions Schemes Bill
Powers to make further provision
Powers to extend definition of qualifying schemes
(1) The Secretary of State may by regulations remove the exclusion of any of the
following from the definition of “qualifying scheme” in section 3—
(a) pension schemes not established solely by one or more persons to
whom section 1(2)(a) of the Pension Schemes Act 1993 (employer)
applied when the scheme was established;
(b) pension schemes used, or intended to be used, by two or more
employers some or all of which are not connected with each other.
(2) In this section “relevant scheme” means a collective money purchase scheme
that could not be a qualifying scheme, or a section of a qualifying scheme, but
for regulations under subsection (1).
(3) The Secretary of State may by regulations make further provision about
relevant schemes, including—
(a) provision about the authorisation of schemes by the Pensions
(b) provision about triggering events and continuity options;
(c) provision about administration charges during triggering event
(4) Regulations under subsection (3) making provision about relevant schemes
used, or intended to be used, by two or more employers some or all of which
are not connected with each other may among other things—
(a) make provision corresponding or similar to provision made by or
under Part 1 of the Pension Schemes Act 2017;
(b) disapply any provision of that Part in relation to such schemes.
(5) Regulations under this section may among other things—
(a) modify a provision of this Part, or any other enactment, as it applies to
(b) amend, repeal or revoke a provision of this Part or any other enactment.
(6) Regulations under this section are subject to affirmative resolution procedure.