This is the way that CDC works and we’d hope that a CDC sees an infinite horizon for its future but……

If a DB gets into trouble it goes to its sponsor for more money and if in extremis the sponsor cannot meet the bill then the scheme goes into the PPF. But it’s not like that if a CDC cannot pay pensions with a target CDC of inflation (CPI) on increases.

If it just takes too much out to meet its costs and doesn’t make enough on its investments, then it can trigger action from the Pension Regulator. TPR can demand action to put things right, pass the CDC to another CDC provider or close down in an orderly fashion. Using the word “continuity” may sound odd but it’s what the DWP dreamed up and what the Pension Regulator outlines on its website, as the fate for failing CDC schemes.

If TPR considers things are going wrong it triggers an event that leads to things being put right so that members do not suffer. There is no PPF, no sponsor to fall back on, continuity is worked out by the CDC scheme , perhaps with the help of another CDC scheme. Just as with the workplace master trusts, there is value to one CDC scheme of being one of a number of CDC schemes.

Continuity strategies for CDC

A CDC scheme does not set out to fail but it does need a continuity strategy that includes  preparing for a triggering event and the three continuity options if a triggering event occurs.

Since August 2022, the Pensions Regulator has had a continuity strategy: overview, written down. This is an overview of the requirement to have a continuity strategy that sets out how members interests will be protected after a triggering event.

This includes an understanding of the CDC’s preparing for a triggering event. This is an ongoing requirement of the trustees and the proprietor assessing the risk of a triggering event, planning the initial response and continuing to operate the scheme, even when things aren’t going so well

When a trigger event occurs and the scheme needs to follow a continuity strategy

The most final strategy that could be followed is called Continuity option 1:  this means discharging  liabilities and winding up  The Pension Regulator lays out the key issues to consider when discharging the scheme’s liabilities and winding it up. All members continue to get a pension or a promise of a pension but with another scheme.

The happiest strategy that could be followed is called Continuity option 2: this means resolving what brought about the triggering event  Once again TPR outlines the key issues to consider when resolving a triggering event. To use the colloquial , this is about putting things right.

The third option, where neither option 1 or 2 can be followed is called Continuity option 3: this means closing the scheme to new contributions or members Once again TPR lays out the key issues to consider when closing the scheme to new contributions or members. This is not so immediately final and may be thought of as  the “option of last resort”. For that reason, it needs to be taken on board by CDC schemes as what they must consider possible if all else fails. For those who like to know what the worst looks like, the Pensions Regulator lays things out.

In my view , Continuity 3 should be learned and lodged  in a CDC proprietor’s  memory. It is not something that a proprietor or trustees should want to happen but it is something they take on as their duty in the event of all else failing.