A third way – collective money purchase pension schemes

The Pension Schemes Act 2021 introduces a framework for a new type of pension scheme – collective money purchase schemes. Also known as collective defined contribution or CDC schemes, this type of pension scheme offers a middle path between traditional defined benefit (DB) and defined contribution (DC) schemes.

Employer and member contributions are fixed, as in a DC scheme. However, investment and longevity risks are borne collectively by the members, rather than being borne exclusively by the employer (as in a DB scheme) or exclusively by the individual member (as in a DC scheme). Members are promised a target retirement income, but this can be adjusted up or down to reflect the scheme’s investment performance and other risks as longevity experience.

The government is currently consulting on draft regulations setting out further detail of the legal framework for CDC schemes. The consultation closes on 31 August.

Who will be able to set up a CDC scheme?

Only a single employer or two or more “connected” employers (e.g. members of a corporate group) will be able to set up a CDC scheme. Schemes must obtain authorisation from the Pensions Regulator (TPR) in order to operate and, once authorised, will be subject to ongoing supervision by TPR.

What will be required for authorisation?

In order to obtain authorisation, a CDC scheme will need to meet the following criteria:

• The persons involved in the scheme must be fit and proper persons.
• The design of the scheme must be sound, as demonstrated by a viability report and by an actuarial viability certificate.
• The scheme must be financially sustainable.
• The scheme must have adequate systems and processes for communicating with members and others.
• The systems and processes used in running the scheme must be sufficient to ensure that it is run effectively.
• The scheme must have an adequate continuity strategy.

The draft regulations set out more detail about these criteria, and TPR will be required to produce a code of practice that will provide more information about what TPR expects from schemes.

TPR will maintain a published list of authorised CDC schemes.

What will the supervision regime look like?

Once authorised, CDC schemes will need to:

• Submit annual supervisory returns to TPR.
• Notify TPR if certain “triggering events” occur (e.g. a scheme employer suffers an insolvency event).
• Pursue the specified “continuity option” which will vary depend on the nature of the triggering event.

If TPR stops being satisfied that an authorised CDC scheme meets the authorisation criteria, it can withdraw the scheme’s authorisation.

The draft regulations provide further detail on the supervision regime, as will the TPR code of practice.

CDC schemes will also be subject to disclosure and member protection obligations similar to those that apply to DB and DC schemes, but tailored to reflect the particular nature of CDC schemes.

When will the framework for CDC schemes come into force?

The government has not yet announced when the framework will come into force.

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