The way clear for CDC to prosper as a workplace pension

It is something of an open secret that DWP see CDC working as a way of building up as well as getting paid a pension.

Some doubt persisted that this could be done and that those who’d saved into A DC would have to transfer their pot to a CDC scheme using the difficult processes of voluntary transfer. This would have put a ring around DC master trusts in particular (so far no way has been put forward to make personal pensions move automatically into CDC plans because an employer wishes it).

DWP have told organisations that meet with them that they can build their business cases and ultimately their business plans around bulk transfer of DC pots in exchange for CDC pensions with the exceptions being opt-outs where individuals would prefer to have a pot rather than a pension. Here’s  CA’s Christopher Marchant’s report.

The Department for Work and Pensions has laid out a path towards member assets being transferred into a proposed Retirement Collective Defined Contribution plans without express consent, in its response to a public policy consultation on pension schemes.

The consultation sought views on a draft amendment in which such transfers could be made to authorised CDC schemes.

The proposed amendment resembles similar such legislation passed by the government in 2018, which in that instance also allowed for master trusts to transfer retirement savings without member consent.

The amendment will mean that prospective CDC schemes, including unconnected multiple employer collective money purchase schemes, will be able to receive transfers without member consent into their schemes in the same way that master trusts are able to.

Members of CDC schemes will of course be able to transfer out before they start taking their pension.

The DWP response can be found from this link

Government Response

1. As is the case with DC pension schemes, there are no guarantees in CMPS, and collective money purchase benefits are a sub-set of money purchase benefits^{[footnote 4]}. As with DC schemes, members of CMPS have a statutory right to transfer out of the scheme until they crystallise their benefits. We appreciate that the benefits in CMPS may be managed and structured differently and that the risk profile may also be different, but the benefit itself is still money purchase i.e. there are no guarantees as is the case with non-money purchase benefits^{[footnote 5]}.

2. We agree that this provision should not apply to retirement CDC schemes. Members will retain a statutory right to transfer out of the receiving CDC scheme until they crystallise their benefits. We do not consider it appropriate to be able to transfer members without consent into a retirement CDC because they may not be able to transfer out if they want. We will consider what steps if any are needed to ensure this provision does not apply to retirement CDC schemes.

3. With regards to the suggestion that trustees should take advice before a transfer takes place, we have adopted the same approach taken in respect of Master Trusts, since both that regime and the CMPS regime are subject to a rigorous authorisation and supervision regime. Non-statutory guidance^{[footnote 6]} for trustees regarding transfers without member consent was published in 2018 and this made clear that advice was not required in a transfer without member consent to a Master Trust. This was because in order to become authorised, such schemes have to satisfy minimum criteria, covering, amongst other things, governance and administration. This is also the case with CMPS. Trustees’ existing fiduciary duties will require them to carefully assess what is in the best interests of their membership before deciding to transfer members. This will include an assessment of the differing nature of CDC schemes and why such a transfer would be in the interests of the members.

4. The guidance also makes clear that trustees are not prohibited from taking advice if they consider it appropriate to carry out their fiduciary duty. We intend to follow the same approach taken by Master Trusts. It should also be noted that regulation 12(9) of the 1991 Regulations already allows trustees to undertake transfers where they have taken independent advice.

5. We have considered the concerns raised about the drafting and whether it would cover CMPS sections and agree that the drafting should be amended to make clear that CMPS sections that are the receiving scheme for the transfer of members without consent will also be covered. The alternative wording now adopted in the amendment looks to ensure transfers can be made to CMPS sections.

6. On whether members should be given the right to opt out and have sufficient time to do so, there is nothing in the 1991 Regulations that prohibits this. Where provided, trustees will need to take into account the member’s view in determining whether a transfer is appropriate. If the trustees determines that the transfer is appropriate and proceed with the transfer against the member’s wishes, the member will still retain the statutory right to transfer out of the receiving CMPS to an alternative scheme if they wished to do so.

7. Regulation 12(4)(B) of the 1991 Regulations already stipulates that information about the transfer should be provided to members at least one month before the transfer takes place. We expect this to include information about the CDC scheme, its benefits, the specific nature of CDC and what it will mean for members. We consider that this is an appropriate notification period for transfers without consent to receiving CMPS.

8. On the point about granting employers to request such transfers and taking their views into account, we consider it entirely appropriate for the trustees to be the ones to decide whether a transfer without member consent should take place. This is because trustees have a fiduciary duty to act in the interests of the members. In practice, we would expect trustees to engage with employers regarding such a transfer, if only to explain why the transfer is appropriate and what it would mean for the members that worked for the employer.

9. We can understand why a few respondents queried whether the proposed amendment should also apply to contract-based workplace pension schemes. However, the provision in regulation 12 of the 1991 Regulations only apply to occupational pension schemes. In addition, the amendment to the 1991 Regulations is intended for receiving CMPS, which are also occupational pension schemes. We do not consider bringing contract-based schemes into scope of the 1991 Regulations is appropriate or indeed necessary since contract-based schemes cannot establish CMPS under Part 1 of the Pension Schemes Act 2021.

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Guidance

1. In 2018, the Department for Work and Pensions produced non-statutory guidance^{[footnote 7]} in support of amendments that were made to regulation 12 of the 1991 Regulations, and regulation 4 of the Occupational Pension Schemes (Charges and Governance) Regulations 2015, which were effective from 6 April 2018. As mentioned above, this included making an authorised Master Trust a condition under which transfers without member consent could be made.

2. The guidance is intended to assist trustees in complying with the new legislative requirements. This guidance has also now been amended to reflect the change we propose making in respect of collective money purchase schemes or sections authorised under Part 1 of the Pension Schemes Act 2021.