The consultation on the regulation of CDC schemes begins today and ends on August 30th, it is a summer holiday job and timed to get a little attention as possible.
As a statement of intent, Guy Opperman’s foreword is different in tone and language to what has come before.
One of the benefits of offering CDC benefits is that members do not have to make once and done decisions about what to do with their pension pot as by default a CDC scheme will deliver a pension in-house. CDC schemes also have greater potential than individual defined contribution schemes to invest in illiquid assets such as infrastructure.
The idea of a “pension in house” is certainty not one I have heard before. It is a return to the concept of the “scheme pension” with which anyone associated with Defined Benefit arrangements is familiar. It is most definitely not an investment pathway and suggests that CDC scheme will offer a “firth way to the annuity/drawdown/roll-up/cash-out conundrum.
It’s good to see Opperman articulating what has always been clear, that CDC multi-employer schemes are the logical extension of the consolidation papers of recent months , offering the opportunity of better outcomes though investment in a wider range of assets held patiently over time.
And while the immediate focus is on Royal Mail and the opportunities for single employer schemes, the foreword has a much wider vision than has previously been articulated.
Many want to see non-connected multi-employer CDC schemes, Master Trusts and decumulation only CDC schemes. That interest is very welcome. I have no doubt collective provision can benefit millions of pension scheme members when its full potential is realised.
We will have to guess what a non-connected multi employer scheme might be (if any different from a Master Trust) and speculate about how a decumulation only CDC scheme might work without an employer in place at all.
But the statement that these types of scheme are in future regulatory scope is very welcome indeed. We cannot rely on the investment pathways and the advisory framework to sort out the problems people have at retirement with their pensions.
What’s being consulted on?
The regulations are clearly based on the master trust assurance framework.
The DWP’s questions focus on the following areas:
i. Scope and application
ii. Application process
iii. Authorisation criteria
iv. Valuation and benefit adjustment
v. On-going supervision framework
vi. Publication and disclosure of information
vii. Member protection and transfers
viii. Consequential changes
I’ll summarize what’s going on in some simplified analysis that is likely to change as understanding becomes clearer.
We look forward to opening up CMP provision to a broader range of models in the near future when aspiring market participants have further developed their product designs.
There is in the phrase “market participants”, a hint of providing CDC as a commercial activity , reinforced by it being considered a “product“, designed by those aspiring to participate. This is a long way from previous talk CDC as an employee benefit, this is about attracting funds to CDC funders.
Master trusts (such as USS , the Railways Pension Scheme and even the FCA’s are within immediate regulatory scope, schemes which are open to any employer – aren’t (yet).
Each section of a CDC offering which offers a different accrual rate will need to be authorised as a separate scheme and pay separate scheme charges. This looks like an incentive to keep things simple.
The Application Process
The intent is to put the onus on the applicant to demonstrate how the scheme meets the authorisation criteria. The criteria are laid out in Chapter 3 of the consultation and are mainly related to the scheme being run by fit and proper way by fit and proper people,
The cost of setting up a CDC scheme will be between £50,000 and £120,000 but discounts will apply where a scheme is being set up within an authorised scheme where the charge will be levied on a time-cost basis..
Viability is the buzz-phrase of this consultation. It introduces two new documents
the viability report and viability certificate produced by the scheme’s trustees and scheme actuary respectively
Viability relates to the scheme’s ability to deliver its benefit “aspirations” ( a word that returns to the fold after being subbed by “ambition).
The rules around viability are intended to protect members from approaches to benefit calculations and adjustment which may lead to intergenerational unfairness.
A new role for actuaries
Whilst the onus is on the scheme’s trustees to prepare the viability report, the involvement of the scheme actuary in certification recognises that actuaries, rather than trustees, are best placed to consider actuarial matters and to advise on how these impact the soundness of the scheme at any particular point in time.
This looks a powerful appointment for an actuary who is both the validator of viability and potentially the whistle-blower when a scheme becomes unviable. This puts the actuary and trustee in quite separate boxes and could lead to some interesting questions on conflicts of interest.
The tests of “soundness”
Along with “viability”, “soundness” is a key word and is will be assessed through gateway tests including the capacity of a scheme to pay inflation linked pensions using CPI as the measure.
As well as gateway tests there will be tests in running to ensure that the scheme remains sound and viable and these will include value for money testing.
Failure to meet these tests will create triggering events which could require action such as a decrease in benefit levels or even scheme wind-up.
The bulk of the regulations concern themselves with the administration and communication of the scheme and in particular with the disclosure of the scheme’s capacity to change the levels of benefit paid
We are therefore suggesting amendments to the Disclosure Regulations to ensure that appropriate disclosure requirements are fit for purpose and meet the unique design of a CMP (collective money purchase or CDC)scheme. This includes the collective nature of CMP schemes and the important key message that CMP benefits can fluctuate, reiterating this at key points in the member journey (at joining, on an on-going annual basis, approaching retirement and to pensioner members with benefit in payment).
No doubt these disclosures will never be strong enough for those who don’t believe any benefit should be offered on a discretionary basis. However , the focus in the consultation on getting the management of expectations right is welcome.
CDC schemes will be mono-fund and the existing rules on the charge cap will apply. Specific reference is made of the new rules around performance fees and de minims limits for combination charges.
Protecting employers from funding a DB promise
The regulations should give employers comfort that they will not be held to the CDC pension promise if the level of benefits decreases (the problem that occurred for KPMG when it’s target DC plan developed a funding deficit).
We have always been clear that CMP benefits should be subject to the same subsisting rights protections as other types of pension benefits as far as that is appropriate. For example, section 24 of the 2021 Act amended sections 67 and 67A of the Pensions Act 1995 to prohibit the transformation of defined benefits into CMP benefits. The amendments also imposed a requirement for member consent to be obtained where there is a transformation of CMP benefits to other types of money purchase benefits and vice versa. However, CMP benefits are unique in that the level of benefits is adjusted annually in line with the provisions at sections 18-23 of the 2021 Act, regulations 17 to 20 and the scheme rules. The amendment to the Occupational Pension Schemes (Modification of Schemes) Regulations 2006 in Annex D provides clarity that such adjustments, if made in compliance with those provisions, are not in conflict with the subsisting rights provisions.
I’d be particularly interested in the comments of lawyers on the optionality the DWP seem to be pointing towards and thank Philip Bennett for explaining the inclusion of this in the consultation. Philip’s response to the earlier CDC consultation seems to have been listened to.
Transfers in will be allowed at a trustee’s discretion and will buy future rights to the scheme pension, Transfer outs will be allowed for those not receiving a pension, it is unclear whether transfer rights will be allowed for those who are receiving a pension. In a rare show of emotion the paper warns
The primary purpose of a CMP scheme is to provide an income in retirement until death, not to provide a cash sum.
The draft regulations and the consultation that accompanies them are another step on the way to a full CDC regime in the UK. Infact , other than the publication of the Pension Schemes Act, this is the biggest step yet.
There will follow secondary regulations early next year resulting from the DWP’s consultation on what commercial master trust providers want to do with CDC.
From there we may see further applications for CDC but right now we can feel comforted that something is at last being done to provide the nation with a wage in retirement solution to the retirement savings problem.