Consultation RESULT – Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2021-UK
The Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2021
Public Consultation on Draft Regulations to support Part 1 of the Pension Schemes Act 2021 and associated consequential changes.
DATE: 15 December 2021
About this consultation
This consultation seeks views on the draft regulations and associated consequential changes that will implement the new authorisation and supervision regime for Collective Money Purchase schemes (CMP), commonly referred to as Collective Defined Contribution (CDC) schemes[footnote 1], under the provisions of the Pension Schemes Act 2021 (the 2021 Act).
These draft regulations are designed to enable the launch of single or connected multi-employer CDC schemes, which will also accommodate the launch of the CDC scheme that Royal Mail (RM) and the Communication Workers Union (CWU) aim to deliver. Establishing the regime in regulations allows it to be amended more rapidly in response to market innovation and development. We want to build on the experience of the RM scheme and others that may follow before we seek to facilitate other forms of CDC provision.
The 2021 Act contains powers to make regulations to enable models such as decumulation-only vehicles, commercial master trusts and industry-based multi-employer schemes to be brought into the authorisation and supervision regime in the future.
The 2021 Act introduces an authorisation and supervision regime for CDC schemes, which will help ensure that:
- only schemes that are well run and built on sound foundations are allowed to operate
- schemes must have a clear strategy and resources to deal with any problems that may arise
- schemes must have an effective framework for communicating with members
- the interests of members continue to be protected throughout the life of the scheme
- the Pensions Regulator (“the Regulator”) has appropriate powers to intervene when necessary
These draft regulations have been developed in close consultation with the Regulator.
HM Revenue & Customs (HMRC) are making the necessary changes to the tax regime to provide for CDC schemes.
CDC authorisation and ongoing supervision will be administered by the Regulator who will produce detailed practical support for schemes through operational guidance and a Code of Practice. The Code of Practice will be published in draft and will be subject to a separate public consultation.
Who this consultation is aimed at
We expect this consultation to be primarily of interest to:
- employers who sponsor an occupational pension scheme
- those seeking to establish a collective defined contribution (CDC) scheme
- pension professionals
- pension scheme members
Purpose of the consultation
This consultation seeks your views on draft regulations that set out what CDC schemes must do to become authorised, to operate effectively in the market under regulatory oversight, and what happens if changes need to be made to their schemes.
The authorisation regime is designed to protect members and to build confidence in this new form of money purchase occupational pension provision by ensuring only soundly designed and well run schemes are able to operate.
We ask specific questions about some elements of the draft regulations and would also welcome broader views on whether the regulations effectively deliver our intended outcomes.
Scope of consultation
Pensions policy is a reserved matter in Scotland and Wales, this consultation therefore applies to England, Wales and Scotland.
It is envisaged that Northern Ireland will make corresponding regulations.
Duration of the consultation
The consultation will run for six weeks from 19 July 2021 to 31 August 2021.
How to respond to this consultation
Please send your consultation responses to:
Please indicate whether you are responding as an individual or representing the views of an organisation.
This consultation is linked to a statutory instrument and our response will therefore be published before or at the same time the instrument is laid.
How we consult
This consultation is being conducted in line with the Cabinet Office consultation principles published in March 2018.
Feedback on the consultation process
We value your feedback on how well we consult. If you have any comments about the consultation process (as opposed to comments about the issues which are the subject of the consultation), please address them to:
DWP Consultation Coordinator
Freedom of Information
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Foreword by the Minister for Pensions and Financial Inclusion
Proponents of Collective Defined Contribution (CDC) pension schemes, referred to in legislation as Collective Money Purchase (CMP) schemes, have long seen them as a third way between traditional final salary schemes that are guaranteed by employers, and individual defined contribution schemes where investment and longevity risks are born by the individual members. Whilst CDC schemes give employers predictable costs for their pension schemes, they also provide the potential of a more efficient way of delivering an income for retirement.
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.
Recent studies have shown that a well-designed and well-run CDC scheme can also be resilient to sudden changes in market conditions, such as we have seen during the current pandemic.
In February this year the Pension Schemes Act 2021 received Royal Assent. This provides the statutory framework for CDC schemes in the United Kingdom. Our approach has been guided by lessons learned from overseas, where CDC schemes are well established, the work done by Royal Mail Group and the Communication Workers Union who are fully committed to creating a CDC scheme, and the wisdom of many pension lawyers and actuaries.
Building upon that, I am pleased to present the next stage in the introduction of CDC schemes. We are seeking views on draft regulations which will expand upon and provide specific detail to the provisions in the 2021 Act.
CDC schemes can only succeed if there is confidence in this new type of provision. These regulations will help ensure that CDC schemes are set up and run well by providing clear criteria by which the Pensions Regulator will authorise and supervise these schemes.
When I published the government’s response to our consultation on CDC benefits in 2019, I welcomed the growing interest in CDC provision. That interest is growing day by day as the legislative framework for CDC benefits becomes clear, and many employers, pension providers and unions can see the advantages it can bring. These draft regulations are a huge step towards fulfilling our commitment to legislate for single employer and connected multi-employer CDC schemes. But I know that this is a job half done. 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.
Right now our priority is to ensure the full framework for single employers and connected multi-employer CDC schemes is in place as soon as we can, and this consultation is rightly focused on delivering that. But we are not deaf to calls from those who wish us to go further. Once this first step is done we will turn our attention to the growing demand for these other types of provision.
Guy Opperman MP
Minister for Pensions and Financial Inclusion
1. In November 2018, we launched a consultation on the government’s proposal to provide a legislative framework for Collective Defined Contribution (“CDC”) schemes[footnote 2]. Responses to that consultation were in the main supportive of the government’s approach. The first stage in delivering that framework was provided by The Pension Schemes Act 2021 (“the 2021 Act”). The 2021 Act provides the legislative framework to establish and operate CDC schemes, but to ensure they sit clearly within the Money Purchase provisions of existing legislation, the 2021 Act refers to them as Collective Money Purchase (CMP) schemes. The terms CDC and CMP are synonymous. As this consultation relates to the regulations made using the powers in the 2021 Act, this consultation will refer to these schemes as CMP schemes to ensure consistency with the legislation.
2. CMP schemes are a new type of money purchase provision that may be set up under trust by a single employer or group of connected employers. The 2021 Act defines what is a ‘qualifying benefit’, and sets out the requirements for a ‘qualifying scheme’. The 2021 Act also provides that a CMP scheme must initially be authorised by the Pensions Regulator (the Regulator) before it can operate. It must also comply with ongoing supervision requirements to ensure it continues to meet the required standards. An application for authorisation must be accompanied by a fee, which is covered in these draft regulations.
3. CMP provision is a new and welcome addition to the UK’s private occupational pension landscape. The novelty and potential complexity of these new models requires specific and targeted supervision to ensure they maintain the confidence of employers and scheme members. This is provided for in the 2021 Act.
4. We are also keen to support the market as it innovates and develops, and want sufficient flexibility to adapt our requirements to keep pace. Detailed provisions related to technical requirements for qualifying schemes are therefore provided through the draft secondary legislation that is the subject of this consultation.
5. The 2021 Act also provides for the Regulator to produce a Code of Practice (Code) that sets out more detailed practical guidance about the authorisation and supervision regime. This Code will be consulted on in due course.
6. The Regulator will assess an application for authorisation of a CMP scheme against the following criteria:
- that the persons involved in the scheme are fit and proper persons
- that the design of the scheme is sound
- that the scheme is financially sustainable
- that the scheme has adequate systems and processes for communicating with members and others
- that the systems and processes used in running the scheme are sufficient to ensure that it is run effectively, and;
- that the scheme has an adequate continuity strategy
7. The draft regulations set out more detail about each of these criteria, and the Regulator’s Code and any accompanying guidance will provide more information about what it expects from schemes.
8. The supervisory regime will require CMP schemes to continue to meet the authorisation criteria on an ongoing basis, and to work productively and proactively with the Regulator when changes need to be made to the scheme.
9. This consultation document focuses on the draft regulations that underpin the authorisation and supervision regime for CMP schemes and asks a number of questions where we would welcome your views.
10. Our questions focus on the following broad 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
11. The draft regulations may be found at Annex A. References in this document to regulations are to the draft regulations in this Annex.
12. An initial view of the potential impacts of the introduction of CMP schemes on members, businesses, government and the public sector was published in support of the Pension Schemes Act 2021[footnote 3]. As these schemes are a completely new type of arrangement and, so far, only one employer has come forward with a detailed design, there remains some uncertainty over the full impacts of the proposals. For the time being, we continue to view the conclusions in the original assessment to be reasonable, but the consultation document includes a number of questions to help us review these impacts in light of the proposed secondary legislation.
Chapter 1: Scope and Applications
13. The 2021 Act defines a Collective Money Purchase (CMP) scheme as a qualifying scheme, or a section of a qualifying scheme, under which all the benefits that may be provided are qualifying benefits. These benefits must include the payment of a pension.
14. Such a qualifying scheme must be used, or be intended to be used, by a single employer or a connected employer. This provision is intended to restrict the permitted models of CMP schemes for now to those used by single or connected employers.
15. Our first priority is to ensure adequate protections and controls are in place for single or connected multiple employers, such as the Royal Mail Group (RMG), whose proposed CDC scheme will be the first of its kind in the United Kingdom.
16. 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. The 2021 Act contains powers to make secondary legislation to facilitate a wider range of CMP scheme designs in due course, building on the learning from this initial tranche of single or connected multi-employer schemes.
Regulation 3: connected employers
17. Section 49(2) of the 2021 Act defines connected employers and regulation 3 of these regulations provides further detail about the ways in which employers may be considered to be connected. For example, employers are connected if they are or have been part of a group undertaking as defined in section 1161(5) of the Companies Act 2006 or if they have been involved in a joint venture in the last six months.
Question 1: Do the draft regulations make it clear to employers whether they are considered to be connected for the purpose of the legislation?
Regulations 4 and 5: qualifying schemes and CMP schemes divided into sections
18. Section 5 of the 2021 Act concerns a situation where a CMP scheme that was previously undivided opts to create a new section offering CMP benefits which are different to the original undivided scheme in respect of any of the prescribed characteristics set out in regulation 4(1) of these regulations. For example, if the single or connected employer wishes to offer new joiners a different accrual rate to that being provided under the scheme that was previously undivided, they would be required to open a new CMP section.
19. Section 5 also provides for regulations to be made to determine what happens to the authorisation that had been previously granted to the scheme that was originally undivided. Regulation 5 sets the process for determining which of the CMP sections the authorisation previously granted to the undivided scheme would apply to. If, however, the sections are providing benefits that have the same characteristics set out in regulation 4(1), the trustees will be required to identify which section the authorisation will apply to, notify the Regulator of their decision and the date it applies from. By virtue of section 5 of the 2021 Act, each new section that may be opened will be treated as a separate CMP scheme, which will need to be authorised before it can operate. The level of application fee that may apply is covered under the application section of this consultation.
20. An open and productive ongoing supervisory relationship between the Regulator and the CMP scheme will be crucial to ensuring the process around applying for authorisation of a new section is a smooth and as cost-effective as possible. Further information about the opening of new sections and associated application fees will be contained in a forthcoming Code of Practice (Code) that the Regulator will make available.
Question 2: Are there any other characteristics that should be added to those that are already listed at regulation 4(1)?
Chapter 2: The Application Process
Regulation 6: information to be included in an application
21. The 2021 Act requires CMP schemes to be authorised by the Regulator in order to operate (which includes beginning to receive contributions from members and employers). The authorisation framework is intended to protect members from being enrolled in poorly designed or run schemes. Section 8 of the 2021 Act prescribes the key information that must be included in an application to the Regulator for authorisation, and also requires that any application be made in the form and manner specified by the Regulator.
22. Regulation 6 sets out the further information to be provided when applying for authorisation. The intent is to put the onus on the applicant to demonstrate how the scheme meets the authorisation criteria – see Chapter 3. As a result, the information requirements have been informed by the matters to be considered by the Regulator under each authorisation criterion.
23. This will be supplemented by further practical guidance by the Regulator in the Regulator’s forthcoming Code.
24. In respect of the fit and proper persons authorisation criterion, the information requirements are intended to help identify persons responsible for establishing and making key decisions in respect of the scheme so that their fitness and propriety can be assessed by the Regulator. The draft provisions are also intended to secure information in respect of matters of interest, such as an unspent criminal conviction.
Regulation 7: application fee
25. Section 7(1) of the 2021 Act specifies that a person cannot operate a CMP scheme unless that scheme is authorised. Section 8(4)(b) of the 2021 Act specifies that the Secretary of State can make regulations requiring a fee to be paid to the Regulator in respect of an application for authorisation. The fee is necessary to enable the Regulator to recover the costs of processing CMP scheme applications without indirectly placing these costs on the wider pensions’ community.
26. At the point when the fee is received with the application (also see the section above ‘Information to be included in an application’), it will be considered a formal application. Under Section 9(2) of the 2021 Act, the Regulator has six months from the day on which they receive the application to reach a decision and notify the applicant of its decision. The intention is that when the fee is paid and all required information is provided it is at that point the timings in section 9(2) will start.
27. Regulation 7 sets out the fee structure for CMP schemes. There will be one flat authorisation fee, which all CMP schemes must pay. The exact amount of the application fee is still to be agreed but following discussions with the Regulator, we estimate that the maximum level of the fee will fall between £50,000 and £120,000.
28. We acknowledge that this will be higher than the fee that applies in the master trust authorisation regime, but this reflects the additional complexity involved in the authorisation process for CMP schemes and the significant actuarial and investment advisory input that will be required.
29. As mentioned in Chapter 1, a CMP scheme can be a section of a qualifying scheme. To also take account of the fact that applications can be made in respect of such CMP schemes and that this could result in potential lower costs if an existing section within the scheme is already authorised we want to ensure that in the case where:
- a section of a scheme is already authorised – any further section applications will each be charged on a cost recovery basis at the discretion of the Regulator (with a maximum cost of the flat set fee amount)
- no other sections of the scheme are yet authorised and applications are made in respect of multiple sections – at least one flat set fee will be charged as the Regulator will need to investigate all six authorisation criteria, the trustees selecting which section they wish the set fee to apply to. All other sections will be charged on a cost recovery basis, at the discretion of the Regulator (again with a maximum cost of the flat set fee amount)
30. Where the Regulator has discretion to determine the fee, it is likely that the Regulator will consider:
- the reason for multiple sections, are there substantive differences in the design of the sections or are there identical sections being set up for different employee groups?
- are the same or different systems & processes in place for all sections?
- are the same persons subject to Fit & Proper persons checks common across all sections?
- the impact of multiple sections on member communications
- the depth of assessment needed on scheme design and financial sustainability across the different sections
31. The calculation of the level of the fee that would be applied in these cases will therefore need to be determined on a case-by-case basis. The Regulator will set out further detail of the application process, including fees in their forthcoming Code. They also intend to issue guidance for employers and other interested parties on the principles that would influence how the fee for additional applications would be set. They would want to see early engagement from trustees and employers so they can understand the changes being proposed and so to apply an appropriate fee.
Question 3: Do you agree with the proposed fee structure, taking into account schemes containing multiple CMP sections?
Chapter 3: Criteria for Authorisation
32. A scheme applying for authorisation must satisfy the Regulator that it meets the authorisation criteria. These criteria are listed in section 9(3) of the 2021 Act as follows:
- that the persons involved in the scheme are fit and proper persons
- that the design of the scheme is sound
- that the scheme is financially sustainable
- that the scheme has adequate systems and processes for communicating with members and others
- that the systems and processes used in running the scheme are sufficient to ensure that it is run effectively, and;
- that the scheme has an adequate continuity strategy
33. Many of these criteria will be familiar from the authorisation regime for master trust schemes. However, the requirements have been adapted or added to so that appropriate scrutiny is applied to CMP schemes at initial authorisation and on an ongoing basis.
Regulation 8 and Schedule 1: fit and proper persons requirement
34. The Regulator is required under the 2021 Act to decide whether it is satisfied that specified persons are fit and proper to act in relation to the scheme in the capacity specified. The fit and proper criterion is intended to protect members by ensuring that persons who establish and make key decisions in respect of a CMP scheme demonstrate appropriate standards of integrity and understanding to act in the capacity specified in the 2021 Act.
35. A list of these key persons is set out in section 11(2) of the 2021 Act. It is expected that in the first tranche of schemes, the persons acting in relation to the scheme in the capacities mentioned will be either the employer, the trustees or a combination of both.
36. When developing the regulations, we considered whether the list at section 11(2) of the 2021 Act should be supplemented and it was decided that a further addition was needed. This is to ensure that the fitness and propriety of individuals performing relevant functions in a body corporate (that is a person listed at section 11(2)(a) to (d) of the 2021 Act) are considered by the Regulator. This addition is provided for in regulation 8(2).
Matters to be considered by the Regulator
37. Schedule 1, introduced by regulation 8, specifies the matters the Regulator must take into account in assessing whether a person is fit and proper to act in a capacity mentioned in section 11(2).
38. Broadly, these matters fall into 3 categories:
39. Given the additional complexity of CMP schemes, the trustees of a CMP scheme must have appropriate experience, knowledge and understanding to properly discharge their duties.
40. We expect a board of trustees to be competent as a whole to carry out the functions required of it at the point of application, and on an ongoing basis, and to show how they will meet and continue to meet those requirements. We also want individual trustees to be able to demonstrate they have sufficient skills, knowledge and experience in their application.
41. The Regulator will outline what is expected, in its forthcoming Code, in terms of the knowledge and experience deemed sufficient for individual trustees and for the board as a whole.
42. The regulations require the Regulator to take into account matters concerning competence, both collective and individual, as part of its assessment of whether a trustee is fit and proper to act in that capacity (see paragraph 2 of Schedule 1).
Conduct and Integrity
43. The integrity and conduct of all key persons set out in section 11(2) of the 2021 Act should be considered equally and the regulations provide that the Regulator must have regard to all matters set out in paragraph 1 of schedule 1 of the regulations. This will help ensure the honesty and propriety of the persons involved in the running of the scheme.
44. Some of the matters in paragraph 1 may be considered sufficiently serious and relevant to the integrity of the person that the Regulator would in all circumstances preclude that person from meeting the requirements. In other matters, the Regulator will consider and use its discretion in reaching a judgement about whether, for the particular role held, it is a matter that should prevent the person from acting in that capacity.
45. The Regulator will provide more practical guidance in its Code and operational guidance about how the matters will be assessed, to give sufficient transparency to applicants about how the matters will impact their application for authorisation. The matters to be considered by the Regulator are similar to those it considers when authorising master trusts. These include:
- unspent criminal convictions
- settlements and findings in civil proceedings
- disqualification of directors
- prohibition of trustees
- contravention of the rules of any other regulatory authority
46. In addition, when assessing whether a person is fit and proper to act in the relevant capacity, paragraph 1 of schedule 1 to the regulations requires the Regulator to take into account the person’s conduct in relation to, or arising out of or in connection with, any work the person has carried out in one or more of the capacities specified in section 11(2) of the Act in the five years before the date of the application for authorisation of the scheme and at any time since that date. The Regulator will not only take into account a person’s previous behaviour but it will also continue to monitor future conduct as part of their supervisory role. A similar approach is used in the authorisation of master trusts.
Question 4: Are there any significant practical barriers to schemes meeting these requirements?
Regulations 9, 10, 11 and Schedule 2: scheme design requirement
47. If confidence in CMP provision is to grow, it is important that the benefit aspirations in such schemes are based on sound foundations, and that their designs are thoroughly tested against likely threats, to provide assurance that they will behave as intended.
48. Section 12 of the 2021 Act relates to the scheme design requirement, an authorisation criterion which aims to protect members from being enrolled in ill-considered and poorly designed CMP schemes, which are unlikely to remain viable over the long-term. It requires the Regulator to be satisfied that the design of a CMP scheme is sound.
49. Key to this is consideration of the viability report and viability certificate produced by the scheme’s trustees and scheme actuary respectively (see regulations 9 to 11 and schedule 2). These are documents which must be considered by the Regulator in relation to the scheme design criterion.
50. In addition, the 2021 Act also requires that the Regulator must take into account any matters specified in regulations (see regulation 11 and part 3 of schedule 2). These fall into two categories:
- those relating to the scheme’s design; and
- those relating to the scheme’s ability to deliver its benefit aspirations – i.e. its viability
51. Matters to be taken into account in respect of the former include whether the scheme’s rules meet prescribed requirements under section 18 of the 2021 Act. These are intended to protect members from approaches to benefit calculations and adjustment which may lead to intergenerational unfairness.
52. The Regulator is also required to consider whether a scheme’s design is compliant with the definition of a CMP scheme.
Matters in relation to the viability report and certificate
53. Under subsection (1) of section 13 of the 2021 Act, the trustees must prepare a viability report explaining the design of the scheme and why it is sound. In addition, they must also obtain certification (a viability certificate) from the scheme actuary that the design of the scheme is sound.
54. 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.
55. Sub-section 13(3) of the 2021 Act, provides for regulations to make provision about the content of a viability certificate, and specify matters to which the scheme actuary must have regard when providing a viability certificate.
56. In respect of the content of the viability certificate, regulation 10 sets out requirements in respect of the basic information that must be included in the viability certificate and in relation to the format in which it must be submitted.
57. We are mindful that the meaning of “sound” may be open to interpretation. We have therefore worked with the Regulator and the Institute and Faculty of Actuaries to produce some indicators of soundness which the scheme actuary must have regard to when certifying the design of the scheme as sound.
58. It is important to recognise that the level of CMP benefits isn’t intended to be guaranteed, and it is not our intent that these requirements should compromise that basic principle. For example, it is right that if circumstances change during the running of a CMP scheme, and benefit levels change in response, the scheme is simply doing what a CMP scheme is intended to do. That is, delivering the level of benefits the scheme can afford based on the most recent actuarial valuation. However, we are mindful that this could, in some circumstances, lead to significant unfairness between cohorts of members.
59. The regulations therefore seek to set out sensible parameters to weed out applications in respect of poorly designed schemes whose members may be better off saving for retirement elsewhere, or to highlight emerging threats in live schemes, such as an increasing risk of intergenerational unfairness, which suggest it should close to new accruals.
60. Broadly, these indicators of soundness fall into three categories. Matters that should be considered:
- at initial application and during subsequent annual reviews during live running
- at initial application only (i.e. a gateway test)
- at subsequent annual reviews during live running (i.e. a live running test)
61. Where an indicator of soundness is not met, the intention is that the scheme actuary should not certify the scheme’s design as sound, and bring this to the attention of the trustees.
62. Regulation 9(2)(a) relates to the requirements in respect of scheme rules and the calculation of benefits which seek to address the risk of intergenerational unfairness. These are an essential part of sound design and should therefore be considered as part of the certification process.
63. Regulation 9(2)(b) requires the consideration of whether the trustees have accurately communicated to the scheme’s members the design of the scheme and the CMP benefits envisaged under the design of the scheme. The rationale for this test is that member communications should not mislead members in respect of how their scheme works and how this may impact on their benefits during its lifetime, in good times and bad.
64. For the reasons explained, these will be ongoing considerations, so the regulations require the scheme actuary to have regard to these matters when providing a viability certificate at initial application and during subsequent annual reviews.
65. Regulation 9(2)(c) sets out the matters the scheme actuary must have regard to as part of the initial certification in support of authorisation – i.e. the gateway tests. The rationale behind these considerations is to help ensure that inappropriately designed schemes are refused authorisation on application before contributions are received into the scheme.
66. The first gateway test considers whether the expected increase in benefits over a prescribed period is at least in line with the expected level of the consumer prices index (CPI). There is no requirement that CPI increases must be awarded every year across the scheme’s lifetime. However, we believe it is reasonable that CMP schemes should aspire to a level of inflation proofing as part of their design. This helps protect members from regular cuts in the nominal level of benefits, and if schemes are not designed to provide inflation protection, younger members may find that the value of what they receive in real terms, is far below what was originally communicated to them, because their benefits have not kept up with real world increases in prices.
67. The second gateway consideration is whether the value of the benefits expected to be provided to members over a prescribed period is at least equal to the contributions paid to the scheme by or in respect of the member. This basic ‘value for money’ test is applied both at initial authorisation and as part of the scheme actuary’s annual recertification of viability. The rationale behind this consideration is to assess the impact of cross subsidisation between members, as this could particularly impact upon younger members.
68. Whist the ‘gateway tests’ are intended to provide some assurance that a CMP scheme will commence operating on a sound footing with a realistic chance of delivering its aspirations, we recognise that circumstances will change over-time and that the assumptions and the modelling used at application may become outdated, or events will occur[footnote 4] which affect the financial position of the scheme. Certification is therefore required to be an ongoing, annual process not a one-off check.
69. However, fluctuations in the level of future benefits paid to members in CMP schemes are to be expected. A CMP scheme will have good years and bad years, which may affect what it can pay for periods of time, for example increases below CPI or cuts to benefits may be required in some years. This variability is a necessary part of CMP provision and does not in itself suggest the scheme is unsound and should close to further accruals.
70. We do not, therefore, want to impose overly sensitive triggers during live running which would require the scheme to close to new accumulations without good reason. There must be some flexibility during live running for the level of scheme benefits to ebb and flow. However, we would wish to avoid a scenario where active members continue to contribute to schemes that offer very poor value, for example through excessive cross-subsidisation.
71. With this in mind, the regulations provide for two ‘live running tests’ to provide an appropriate backstop for when the scheme might close to further accumulations, which must be considered by the scheme actuary as part of the annual certification of the scheme.
72. The first live running test is the value for money test previously described.
73. The second live running test considers the risk of excessive cross-subsidy and is applied only as part of the scheme actuary’s annual recertification of viability. It requires the average value of benefits accrued over the last 5 years to be not less than half or more than twice the rate of contributions paid to the scheme.
74. The rationale of the test is to avoid large cross-subsidies between benefits accrued in the past and the future. Such cross-subsidies could be perceived as unfair to new joiners or those that joined the scheme a long time ago.
75. Our draft regulations relating to soundness do not currently provide for any criteria for determining when it might be considered appropriate for a CMP scheme to be wound up rather than closed to future accruals. We would not want members to remain in a collective arrangement if this is not in their interest. However, we wish to avoid inappropriate or overly sensitive triggers that would require a scheme to wind up where it is still able to provide better or comparable benefit levels compared to what might be secured elsewhere, even if those benefits are significantly less than those originally aspired to.
76. We recognise that there would be scenarios where a very mature scheme which has been closed to future accruals for some years reaches the natural end of its lifespan, as it is no longer sensible to pay the costs of running the scheme given its small membership. However, we are interested in whether there are other sensible trigger points that suggest the scheme should wind up.
77. We considered whether a requirement for the trustees to consider whether it was in the interest of the vast majority or 90 per cent of members to remain in a CMP scheme might provide sufficient leverage. However, we are concerned that this would be very difficult to determine in practice and be open to different interpretations. In the absence of such a test in the draft regulations, we welcome views on what measures or indicators might provide sensible criteria for considering whether a CMP scheme, including closed schemes, should wind up. We would also welcome views on what might constitute suitable evidence to support this decision.
Question 5: Do the proposed gateway and ongoing tests provide a sensible measure of whether a scheme’s design is sound, at initial application and going forward?
Question 6. What back-stop should be provided in regulations which would require a CMP scheme to wind up rather than close to further accruals? What might constitute suitable evidence to support this decision?
Regulation 12 and Schedule 3: financial sustainability requirement
78. This criterion, provided for under section 14 of the 2021 Act, aims to ensure CMP schemes have sufficient financial resources and well considered strategies to meet the costs of setting up and running a CMP scheme, as well as costs associated with the occurrence of a triggering event[footnote 5]. The Regulator will require evidence to enable it to decide whether it is satisfied that a CMP scheme is financially sustainable, including:
- the estimated costs of setting up and running the scheme
- details of the scheme’s sources of income, and;
- the trustees’ strategy for meeting any shortfall between its income and costs including the cost of resolving any triggering event
79. A CMP scheme will need to have key elements in place before it can be authorised and begin to operate. In deciding whether it is satisfied about a scheme’s financial sustainability, schedule 3 of the regulations, introduced by regulation 12, requires the Regulator to take into account various matters in making its decision. Part 1 of schedule 3 covers the information relating to a scheme’s financial sustainability that must accompany an application for authorisation.
80. Part 2 concerns the matters the Regulator must take into account when considering whether a scheme has sufficient financial resources to meet the costs of setting up and running a CMP scheme as well as the costs associated with the occurrence of a triggering event. This includes estimates of these costs, details of the sources of the income the scheme intends to rely on to meet these costs and its strategy for meeting any potential shortfall. The regulations also require the Regulator to take into account the robustness of the scheme’s estimates of these costs and of their strategy to meet any potential shortfall. Any estimates should encompass the full range of costs the scheme is expected to incur and not just the routine administration costs. The Regulator will also need to be satisfied that the income the trustees are relying on can be called upon as and when they are needed.
81. Over the life of a CMP scheme, events may occur which impact the security and strength of the financing arrangements which supported the Regulator’s initial authorisation of the scheme. The significant events framework at regulation 23 is designed to provide the Regulator with an early notification about these events. We expect that trustees will in any event keep the Regulator up to date about any planned or emerging significant events because of the collaborative supervisory relationship we envisage developing between CMP schemes and the Regulator.
82. During a triggering event trustees of CMP schemes will be prohibited from imposing new charges on or in respect of members or increasing charges beyond set levels (with some exceptions) and will need to explain in advance how additional compliance costs will be met in the scheme’s continuity strategy (regulation 15). The Regulator must be satisfied that CMP schemes have sufficient financial resources to meet the costs of:
- complying with the duties in sections 31 to 45 of the 2021 Act, as detailed in its continuity strategy; and
- continuing to run the scheme following a triggering event for at least six months and up to two years, as the Regulator considers appropriate i.e. the likely period it will take to resolve the relevant event[footnote 6]
83. Part 3 of schedule 3 of the regulations relates to the scheme’s sources of income for meeting the costs referred to in section 14(2) of the 2021 Act and requires the scheme to comply with relevant requirements, which may include matters set out in the Regulator’s Code. It also stipulates that this income must be available to be used when these costs arise.
84. The Regulator will provide more practical guidance to trustees seeking to evidence this requirement in its forthcoming Code. The approach set out above is similar to that taken in the authorisation of master trusts.
Question 7: Do you think the regulations cover the appropriate matters that must be taken into account?
Regulation 13 and Schedule 4: communication requirement
85. There is a broad stakeholder consensus that effective communications will be crucial to the success of a CMP scheme.
86. Section 15 of the 2021 Act, therefore, introduces a communication requirement, an authorisation criterion which aims to ensure effective scheme communications are delivered to relevant persons in relation to the scheme.
87. Regulation 13 introduces schedule 5, which sets out what matters the Regulator must take into account in deciding whether the scheme meets the communication requirement. These include matters relating to:
- the necessary functionality, quality and maintenance of IT systems for delivering scheme communications
- the systems and processes for ensuring there are sufficient human resources, with relevant skills, qualifications and capacity for delivering scheme communications
- quality assurance systems and processes – whether there are systems and processes for assessing and improving the effectiveness of scheme communications, ensuring they are accurate and not misleading and reviewed by appropriate persons within the scheme
- member engagement – systems and processes for gathering member feedback, taking it into consideration in designing scheme communications and for reporting to trustees and members as to how feedback has been taken into account
88. The main legislative scheme communication requirements setting out how, what, when and to whom information must be provided to occupational money purchase scheme members (and others) are contained in The Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013. Draft regulations have been prepared to amend the 2013 Regulations to take account of CMP scheme disclosure requirements. A separate section below covers this. Although to note this isn’t the only source of legislative requirements concerning scheme communications, other requirements are included, where appropriate, for example in the draft affirmative regulations subject to this consultation, and in other requirements relating to money purchase schemes more widely.
Question 8: What are the financial costs required to set up the necessary systems and processes required to meet the communications criterion? Please outline any one-off and ongoing costs. This may include set up of IT platforms, data management or postal costs.
Regulation 14 and Schedule 5: systems and processes requirement
89. The expectation is that CMP schemes will be well run. They will be expected to have the appropriate systems and processes to enable them to maintain a good standard of administration and governance so that there is adequate security for members’ savings and their data.
90. In deciding whether it is satisfied that the systems and processes used in running a CMP scheme are sufficient to ensure that it is run effectively, the Regulator must take into account any matters specified in regulations. In accordance with section 16(2) of the 2021 Act, those regulations may make provision among other things about various matters set out at section 16(4) of the 2021 Act.
91. Regulation 14 introduces schedule 5, which sets out the matters to be taken into account by the Regulator. For example, whether:
- the IT systems have the capacity and capability to process financial transactions securely, accurately and by automated means
- there are specified systems and processes to support the annual valuation and benefit adjustment process
- there are systems and processes for investing contributions in accordance with the scheme’s investment policy, and for recording investment decisions and for recording, managing and reviewing the risks associated with investment decisions
- systems and processes ensure that adequate member records will be kept and regularly reviewed and cleansed if required, particularly those relating to each member’s pensionable service and their accrued rights within the scheme
- there are systems and processes for ensuring that there are sufficient human resources with the skills, qualifications and capacity necessary to run a CMP scheme in accordance with Part 1 of the 2021 Act
- the systems and processes ensure that, for each financial year, in respect of each scheme member in decumulation, records are maintained including the amount of pension or other benefits received
- there are systems and processes for:
- engaging with and managing service providers
- effectively managing governance of the scheme
- identifying, managing and monitoring risks – operational, financial, regulatory and compliance
- facilitating member engagement, bringing member’s views of the scheme to the attention of trustees and directing any member complaints to the correct channel for resolution
Regulation 15: content of a continuity strategy
92. The continuity strategy authorisation criterion requires trustees of a CMP scheme to prepare a continuity strategy document as part of the scheme’s application. This document sets out how the interests of the scheme members will be protected if the scheme experiences a triggering event. Regulation 15 sets out the information that must be included in the continuity strategy, which is designed to help the Regulator determine whether it is satisfied that the strategy is adequate.
93. The strategy is envisaged to be a high-level but wide ranging and flexible document which provides a framework for identifying key actions, decisions, and owners of actions required to deal with a triggering event period. The continuity strategy must also set out the timescales within which the scheme will resolve the triggering event and how the costs of continuing to operate the scheme and resolve the event will be funded.
94. The aim of the continuity strategy requirement is to demonstrate that trustees have considered and anticipated risks that may arise in future. The strategy should explain what plans trustees have put in place so that the consequences of these events can be managed in an orderly fashion, and that scheme members will be adequately protected during this process.
95. The approach we have taken is similar to that taken in the master trust authorisation regime.
Regulation 16: administration charges and the continuity strategy
96. Section 17(3) of the 2021 Act stipulates that a continuity strategy must contain a section setting out the levels of administration charges that apply to the members of the scheme. This information will help the Regulator determine whether a CMP scheme would be able to meet the costs of a triggering event without the trustees increasing or imposing new charges contrary to section 45 of the 2021 Act.
97. Regulation 16 sets out the information about administration charges that must be included in the continuity strategy in order for it to be considered to be adequate. Again, this broadly follows the approach taken with the master trust authorisation regime.
Question 9: Considering the draft regulations and criteria for authorisation, could you estimate the costs of preparing the information required for authorisation? Please outline the extent and cost of external contractors where they may be required. This may include the cost of setting up IT platforms and infrastructure, actuarial support or additional staffing required to support the creation of scheme design and the planning of financial sustainability or triggering events. Please outline if there would there be any significant differences between DB and DC schemes.
Chapter 4 : Valuation and Benefit Adjustment
98. Regulations 17 to 21 make provision in relation to the annual actuarial valuation and benefit adjustment process. We have always said we want to ensure benefits are adjusted every year in order to keep the value of assets held and the projected costs of benefits in balance. We have also been clear that we want CMP schemes to follow strict rules around benefit adjustment, which ensure that all members are subject to the same adjustments.
99. Regulation 17 seeks to ensure that CMP schemes operate in ways that avoid bias in favour of any group or cohort of members by requiring:
- valuations to be undertaken using a central estimate methodology that does not seek to be overly optimistic or to build in prudence
- any adjustment of benefits to apply to all members without variation
- any increases in benefits resulting from the valuation to be sustainable
100. One concern expressed about CMP schemes is how members, especially pensioner members, would adapt to sudden decreases in benefits. We believe that for a well-designed CMP scheme, cutting the rate of benefit in payment would be a rare event. But we are conscious that in some extreme scenarios cuts in benefit of several percentage points would be needed. Paragraphs (6) to (10) of regulation 17 provide for adjustments, which will apply to all members, to be smoothed over a total of three years where scheme rules allow, and subject to the requirements set out in those regulations.
101. Regulations 18 and 19 set out certain requirements relating to the actuarial valuation. Regulations 20 and 21 set out the duties of the trustees to report and take action where it has not been possible to correctly apply a benefit adjustment for any reason, and the corresponding powers of the Regulator where such an event has occurred.
Question 10: Are the regulations clear about how valuation and benefit adjustment is to take place?
Chapter 5: Ongoing Supervision Framework
102. Once a CMP scheme receives authorisation it will still be required to be able to demonstrate to the Regulator that it continues to meet the authorisation criteria on an ongoing basis. The 2021 Act places certain requirements on CMP schemes including the need for the Regulator to be notified if the scheme experiences a triggering event, which can pose a significant threat to the future of the scheme and the interests of members.
103. The draft regulations provide further details relating to the supervisory requirements set out in the 2021 Act. The Regulator’s supervisory role is vital if the interests of the members of the scheme are to be protected.
104. Section 26 of the 2021 Act requires the Regulator to maintain and publish a list of authorised CMP schemes. Section 30 provides that the Regulator may decide to withdraw a CMP scheme’s authorisation if it stops being satisfied that the scheme is continuing to meet the authorisation criteria.
Regulation 22: supervisory return
105. Section 27 of the 2021 Act provides that the Regulator can give a written notice requiring the trustees of an authorised CMP scheme to submit a supervisory return. The notice must specify the information to be included in the return along with the manner and form in which the return must be submitted and the time period within which it must be provided.
106. The supervisory return will be used by the Regulator to inform its ongoing risk assessment of schemes and enables the Regulator to place a minimum reporting requirement on schemes to maintain at least annual contact with the Regulator. This will complement the close collaborative engagement that the Regulator envisages developing with CMP schemes on an ongoing basis.
107. Regulation 22 sets out the information that may be required in the supervisory return. The Regulator may require details of how trustee competence is being maintained and any other information that is relevant to the authorisation criteria, to the extent this information has not already been provided. This will also provide an opportunity for the Regulator to obtain updates on how the authorisation criteria are being met or if the trustees have any concerns about the scheme’s ability to continue to meet these criteria. The Regulator will provide further information in its forthcoming Code.
108. The supervisory return is an important tool for supervising CMP schemes and ensuring they continue to maintain the high levels of compliance expected from them. Its contents will, alongside the viability report and continuity strategy, inform the Regulator’s ongoing assessment of the scheme against the six authorisation criteria. The Regulator will determine the exact form of the supervisory return including the precise details of what it should cover.
Regulation 23: significant events
109. Section 28 of the 2021 Act provides that the Regulator must be notified in writing by certain specified people, as soon as reasonably practicable, if they become aware that a significant event has occurred in relation to an authorised CMP scheme.
110. These are events that may affect the ability of an authorised CMP scheme to continue to meet the authorisation criteria. For example, a scheme may have a change of trustee. As the fitness and propriety of a trustee is linked to the authorisation criteria, the Regulator would need to be informed of this change so that the new trustee may be assessed against the relevant standards.
111. Regulation 23 sets out the events that must be notified to the Regulator as well as certain information that must also be notified to the Regulator in respect of certain events. These requirements will help to protect members by ensuring that the Regulator is made aware of such events and can engage with the scheme as necessary to obtain additional information or require action to be taken.
Question 11: Do you think that the events listed in draft regulation 23 will provide the information the Regulator needs or are there other events that should be added?
Regulation 24: risk notices
112. Section 29 of the 2021 Act introduces a new supervisory tool for use by the Regulator. This allows the Regulator to issue a risk notice to the trustees of a CMP scheme if it considers that there’s an issue of concern in relation to the scheme and that the scheme will breach the authorisation criteria, or is likely to breach them, if the issue is not resolved.
113. This mechanism enables the Regulator to require action on a structured basis to be taken in order to resolve its concerns before the situation deteriorates any further. It will help mitigate the risk of the Regulator having to decide to withdraw a scheme’s authorisation, which may not be in the best interests of members.
114. The risk notice requires trustees to set out how the issue will be resolved by submitting a resolution plan to the Regulator. Penalties will apply for non-compliance, which reflects the seriousness of the issues and that further regulatory action is likely if they are not resolved. The trustees are also required to provide progress reports to the Regulator so that it can monitor progress and ensure that the appropriate action is being taken.
115. Regulation 24 sets out a timetable that must be met in relation to the steps outlined above and specifies information that must be contained in a risk notice.
Regulation 25: triggering event notification requirements
116. As previously mentioned, triggering events can pose a risk to the future of a scheme and the interests of members. The triggering events in respect of a CMP scheme are listed at section 31 of the 2021 Act. It is essential that the Regulator is told that that an event has occurred so it can ensure that appropriate action is taken to address the event and protect members from that point.
117. Section 33 of the 2021 Act sets out the obligation for persons to notify specified persons, including the Regulator, if triggering event items 4 to 9 occur. Items 1 to 3 are not subject to the notification requirement since they are generated by a decision made by the Regulator.
118. The persons required to make these notifications include the trustees of the CMP scheme as well as employers or relevant former employers depending on the event that occurred. This mitigates the risk of the Regulator being unaware that an event has occurred because the trustees failed to inform them.
119. Regulation 25 sets out the timetable in which these notifications must be made. It also sets out the additional information that must be provided by the trustees if they are notifying employers or relevant former employers. For example, it is important for employers to be given this information so that they can start thinking about what, if any, action they will need to take to protect their workers’ interests. The approach we have taken is consistent with that taken by the master trust authorisation regime.
Regulation 26: approval of the implementation strategy
120. An implementation strategy is a document setting out how the interests of members are to be protected following the occurrence of the triggering event. Section 39 of the 2021 Act stipulates that the implementation strategy must be submitted to the Regulator for approval. It is crucial that the process following a triggering event is managed in as orderly a way as possible to minimise the risk of having a detrimental impact on members.
121. Section 40 of the 2021 Act provides that the Regulator may only approve an implementation strategy if it is satisfied the strategy is adequate and goes on to set out what that strategy must contain in order to demonstrate to the Regulator that this is the case.
122. Regulation 26 provides that the trustees must submit their implementation strategy to the Regulator within a 28-day period. For example, if the triggering event was an item 1 or 2 triggering event then the strategy must be provided within 28 days beginning with the date on which the decision to withdraw authorisation became final. This deadline is aimed at giving trustees a reasonable amount of time to produce and submit an “adequate” implementation strategy setting out how the interests of members of the scheme will be protected.
Regulation 27: administration charges and the implementation strategy
123. Section 40 of the 2021 Act also provides that the implementation strategy must include information about the levels of administration charges in relation to members of the scheme.
124. Regulation 27 sets out how trustees must calculate and set out the levels of administration charges that will apply during the triggering event period (the “fixed charge levels”). A triggering event period commences from the date the triggering event occurs.
125. Essentially, the levels of administration charges in the scheme year in which the triggering event occurred will apply where levels have not changed. Where there has been a change, the lower levels of administration charges, as compared between the scheme year in which the triggering event occurred and the previous scheme year, will apply.
Regulation 28: contents of the implementation strategy
126. Regulation 28 details the information that the trustees must include in the implementation strategy in order for the Regulator to be able to determine whether the strategy is adequate. The information requirements include details of the decisions and actions that will need to be taken in order to resolve the triggering event, identifying the person responsible for taking them and the timescales for taking them.
127. In addition, the implementation strategy must contain a communications plan setting out what information will be provided to employers and members including which continuity option is being pursued. This approach is consistent with that taken with the master trust authorisation regime.
Regulation 29: discharge of liabilities and winding up a scheme under continuity option 1
128. Section 36 of the 2021 Act provides the framework where the trustees of a CMP scheme are pursuing continuity option 1 following a triggering event. This option will arise where the trustees of the CMP scheme are required by the Regulator or choose to wind up the scheme.
129. The requirements of section 36 combined with those in respect of the implementation strategy are intended to protect members by ensuring that the wind-up process takes place within a framework that has been agreed and monitored by the Regulator. Regulation 29 introduces Schedule 6, which provides the details of this framework. Section 42 of the 2021 Act stipulates that CMP schemes can only be wound up in accordance with continuity option 1.
130. The framework set out in schedule 6 aims to ensure that the value of members’ accrued rights to benefits are transferred to suitable pension schemes or alternative payment arrangements, and that wind up is completed in a timely manner and with minimal disruption to members.
131. The details set out in schedule 6 cover a number of key areas related to the winding up of a CMP scheme. These include requirements concerning:
- the available discharge options including the default discharge option. For example, this might be a master trust or a receiving scheme that the employer has established for their employees to be transferred into
- when the winding up period commences and that no new members may be admitted to the scheme and that no further contributions should be paid into the scheme
- the periodic income that must be paid to pensioner members during the winding up period
- the quantification of the value of the member’s rights
- the information that the trustees must provide to members and employers;
- this includes ensuring that employers and members are kept informed and members know what their options are, when the value of their accrued rights to benefits have been transferred and to which scheme or alternative payment mechanism
- the power given to the Regulator to direct the trustees to take certain actions, for example, if they consider members’ rights are being put at risk through failure to comply with these regulations
Question 12: Do you think that draft regulation 29 and schedule 6 meets the policy intent of providing a clear framework in which CMP schemes can be wound up and the interests of members protected?
Regulation 30: resolving a triggering event under continuity option 2
132. Continuity option 2 provides for the resolution of a triggering event. The aim of continuity option 2 is to allow some flexibility for trustees where the triggering event does not warrant the winding up or closure of the scheme.
133. It provides a framework for ensuring appropriate action is taken and that there is an external check that the triggering event has been properly resolved. This is necessary to protect members.
134. Section 37 of the 2021 Act states that where the trustees decide to pursue continuity option 2, they must notify the Regulator when they consider that the triggering event has been resolved.
135. Regulation 30 sets a deadline of 14 days for them to do so. This deadline is intended to give trustees a reasonable amount of time to provide the information the Regulator will need in order to be satisfied that the triggering event has been resolved.
Regulation 31: closing a scheme under continuity option 3
136. Section 38 of the 2021 Act sets out the requirements to be followed by trustees and the Regulator, when a decision is taken to convert the scheme to a closed scheme under continuity option 3 following a triggering event. Closed, in relation to a CMP scheme, means closed to new contributions or new members (or both).
137. This is intended to address a scenario where, for example, an employer with power under the scheme to close the scheme chooses to do so in order to deliver an income stream to members in retirement through the scheme but for the scheme not to have any active members going forward. A scheme may only operate on a closed basis if this is provided for in the scheme rules and the trustees have received a notification from the Regulator that it is satisfied that the preparations for conversion to a closed scheme are complete and will resolve the triggering event.
138. Continuity option 3 recognises that running on a CMP scheme on a closed basis may be justified in some cases and provides a structured framework for securing the Regulator’s permission to run on as a closed scheme.
139. Section 38 provides that the trustees must notify the Regulator when they consider that preparations for the conversion of the scheme into a closed scheme are complete. Regulation 31 sets a deadline of 28 days for them to do so.
Regulation 32: periodic reporting requirement
140. Section 43 requires that during a triggering event period the trustees of a CMP scheme must submit periodic reports to the Regulator. Resolving a triggering event can be complicated so it is important that this work is overseen by the Regulator, as it will have implications for members and employers. This ensures the Regulator is kept up to date with progress and key decisions and events during the triggering event period.
141. Regulation 32 sets the deadline of 14 days for the submission of the first periodic report and sets out the information to be included in that and subsequent reports. This includes decisions concerning the continuity option being pursued, where continuity option 1 is being pursued what the discharge options are and the timescale for completing the steps in the implementation strategy. This approach is consistent with the approach taken with the master trust regime.
Regulation 33: pause orders
142. Section 44 of, and Schedule 2 to, the 2021 Act enables the Regulator to pause a range of activities if it considers that doing so will help the trustees to carry out the implementation strategy or if it is satisfied that there is, or is likely to be if a pause order is not made, an immediate risk to members’ interests or the assets of the scheme and that a pause order is necessary to protect the interests of the generality of the members of the scheme.
143. The activities that may be paused include allowing people to join the CMP scheme or to transfer out of the scheme. Section 99 of the Pension Schemes Act 1993 (PSA 1993) provides that the trustees must facilitate a transfer request within six months of the date of the application. This would not be achievable if a pause order contains a direction stopping transfers out of the scheme. Regulation 33 modifies section 99 of PSA 1993 to accommodate the operation of a pause order that prevents transfers out of the scheme.
Regulation 34: administration charges during a triggering event period
144. Section 45 of the 2021 Act protects members of CMP schemes during triggering event periods by ensuring that, during that period, trustees must not impose scheme administration charges on or in respect of members above a level set out in the implementation strategy. Trustees are also prohibited from imposing new administration charges on or in respect of members or administration charges that arise as a result of the member leaving, or deciding to leave, a CMP scheme during that period.
145. Receiving schemes, that the trustees of a CMP scheme may bulk- transfer members to once a triggering event occurs, will also be prevented from imposing charges above an agreed level or imposing new charges on members, in order to meet costs for which they are liable that are incurred by the transferring CDC scheme or that relate directly to the transfer.
146. Regulation 34 clarifies which administration charges are not subject to the prohibitions outlined above and that the prohibition that applies to receiving schemes also applies to receiving schemes with the characteristics mentioned in paragraph 2(1)(a) of schedule 6 of the draft regulations.
General levy for CMP schemes
147. The General Levy on pension schemes recovers the administration funding provided by DWP to the Pensions Ombudsman, the Money and Pensions Service for its pension guidance function and the Pensions Regulator for its on-going supervision of pension schemes.
148. The Levy was restructured from 1 April 2021 so that different rates apply to different scheme types, including a rate for money purchase schemes, which will apply to CMP schemes.
149. Schemes do not become liable to pay the levy until the financial year following registration. We therefore plan to monitor the development of CMP schemes and the planned regulatory input and use the emerging data to make an informed assessment as to whether any new levy rate band for CMP schemes is appropriate in due course.
Question 13: What are the potential ongoing financial costs associated with ensuring the scheme continues to meet the ongoing supervision requirements? This may include the cost of ongoing actuarial support, communication costs and IT platforms.
Question 14: What steps do you intend to carry out in order to monitor equality impacts on members over time?
Chapter 6: Publication and Disclosure of Information
150. As CMP schemes are a type of money purchase scheme the existing legal disclosure framework for money purchase schemes will apply. Other than a new publication power (as mentioned below) we have not introduced a specific power for disclosure since the existing powers in section 113 of the Pension Schemes Act 1993 can be used. Section 113 allows for the disclosure of information to members (and other relevant persons) in both personal and occupational pension schemes.
151. Falling out of section 113, the principal set of disclosure regulations setting out how, what, when and to whom information must be disclosed to occupational money purchase scheme members (and others) are contained in the Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013 (the Disclosure Regulations).
152. 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 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).
153. The draft amendments to the Disclosure Regulations aim to take a proportionate approach to indicate which information must be provided whilst allowing trustees to tailor this information to the needs of their members ensuring that members are informed of the key information that would be useful whilst not overloading them with lots of details that they are unlikely to read or understand.
154. Some of the amendments are of a more technical nature but the more substantive requirements are explained below. Where no amendment is suggested, and the regulations apply to money purchase schemes, we believe these should still equally apply to CMP schemes. These changes are set out in Annex B.
Amendments to the Disclosure Regulations
Amendments to regulation 4
155. Regulation 4 has been amended to insert new paragraph (9) and (10):
- paragraph (9) exempts CMP schemes from having to provide information that would not be relevant to CMP members, which includes regulation 12A (Pooled funds); regulation 17 (Statement of benefits: money purchase benefits); regulation 18B and 19 (accessing benefits)
- paragraph (10) introduces new disclosure requirements specific to CMP schemes only, including regulation 8A (Scheme closure); regulation 17A (Statement of benefits); regulation 22A (Benefit adjustment information); regulation 22B (Incorrect benefit adjustments); and regulation 29B (Additional publication requirements)
Exempting regulation 18B and 19
156. Responses to the previous CMP consultation in 2018 highlighted that not all the requirements under Part 6 of the Disclosure Regulations in relation to accessing flexible benefits should apply to CMP scheme members since under section 3(5) of the Pension Schemes Act 2021, CMP schemes must provide the payment of a pension. This is one of the benefits of a CDC scheme, as members will not have to make complex choices at retirement. At the same time, members and beneficiaries will still have a right to transfer their benefits to a different scheme to take advantage of the flexible arrangements available under the pension flexibilities.
157. This means there is a balance to be struck between unnecessary burdens to schemes requiring superfluous information to members, which could confuse the member based on their understanding of the default position to CMP pension benefits, whilst at the same time ensuring members do have access to information on their flexible benefits if they do want to know more on their legal right to transfer out of the scheme. We have therefore concluded that although we do not expect CMP schemes to automatically provide members with information on their flexible benefits as under regulations 18B and 19 we feel they should still be able to request this if they wish to do so (under regulation 18A). So, to help ensure members are aware this information is available we are requiring a statement, from normal pension age, in their annual benefit statement (schedule 6A).
New regulation 8A and part 4 of Schedule 3
158. Where a CMP scheme is pursuing continuity option 3, conversion to a closed scheme, it will need to provide information to members and beneficiaries as in new regulation 8A and part 4 of schedule 3, as appropriate.
- regulation 8A and paragraphs (2) and (5) – information to be provided within one month of trustee’s decision to pursue a conversion into a closed scheme. This will specifically notify those members and beneficiaries where there is no employer of that decision. It is expected that those with an employer will be notified under the Occupational and Personal Pension Schemes (Consultation by Employers) Regulations 2006
- regulation 8A and paragraph (3) – to all members and beneficiaries to inform them of the outcome of the Regulator’s decision on the conversion to a closed scheme, within one month of that decision
New regulation 17A and Schedule 6A
159. For CMP schemes new regulation 17A and schedule 6A will replace regulation 17 and schedule 6 that apply to other money purchase schemes – and provide for a member benefit statement. This will need to be provided on an annual basis to all active, deferred and pension credit members to advise them of their benefits under the scheme both at the illustration date and expected at their retirement date. This will be supported by appropriate statements relevant to each different type of member and include other relevant information, as appropriate, equivalent to money purchase schemes.
160. It is worth noting that at present we do not envisage introducing a simpler annual benefit statement as suggested in the department’s recent consultation[footnote 7] published on the 17 May 2021 for money purchase schemes used for automatic enrolment. The consultation advised that not all pension schemes are in scope but that there will be opportunity to learn lessons about the potential applicability in the future. We therefore plan to keep this approach under review as CMP schemes bed in and member feedback can be considered further for this new type of scheme. We do however feel the key principles set out in the associated guidance for a simpler statement would equally apply for trustees to consider for CMP scheme, including that benefit statements should be short, easily understood and readable, accessible and include layering of more detailed information where the regulations allow.
New regulation 22A and paragraphs 15 to 22 of schedule 7
161. For CMP schemes we expect that an annual notification will be sent to pensioner members. This should be provided at least two months before any adjustment is made to their benefits, if an adjustment is applicable, particularly important where benefits cuts are to be made.
New regulation 22B and paragraphs 23 to 29 of schedule 7
162. This notification must be sent to members and beneficiaries of a CMP scheme, as soon as practicable if it is identified that a benefit adjustment has not been applied in accordance with scheme rules or the latest actuarial valuation. This will ensure they are advised of the latest position of the scheme.
Amendments to regulation 18A, schedule 2 and schedule 7
163. The main amendments made to regulation 18A (request for accessing benefits), schedule 2 (basic scheme information) and schedule 7 (accessing benefits) are to ensure that trustees should notify members (and relevant persons as prescribed) at different points in their journey that there is a possibility that benefits may go down as well as up.
164. To note a similar requirement is also included in the new annual benefit statement and pensioner member annual notifications.
Question 15: Do you agree with the amendments made to the Disclosure Regulations for CMP schemes?
Question 16: Are there any other areas within the Disclosure Regulations that you feel should be amended to take account of the unique collective design of CMP schemes?
Publication requirements for CMP schemes
165. Section 46 of the 2021 Act allows for publication of information or documents in a CMP scheme, including that trustees must have regard to guidance prepared by the Secretary of State. Additional publication requirements for CMP schemes are intended to provide an additional layer of transparency for this new type of pension scheme.
166. As with the publication requirements for other money purchase schemes under regulation 29A of the Disclosure Regulations, the intention is that information or documents required to be published should be made available to any interested party (prospective members, members, beneficiaries, prospective employers, employers, industry commentators and other interested parties alike) who wishes to view the communications, free of charge, on a publicly accessible website that can be found using a search engine and accessed without using a password. We will extend the existing DWP guidance[footnote 8] that covers publication requirements to ensure this include CMP schemes.
New regulation 29B and Schedule 11
167. New regulation 29B introduces requirements for CMP schemes to publish:
- their scheme rules and a scheme design statement (as in part 1 of schedule 11) once the scheme becomes operational; and
- a valuation statement (as in part 2 of schedule 11) within three months of the latest actuarial valuation
168. The aim of this is to build confidence and foster trust of the scheme design through building better understanding of how the scheme works and how members’ interests are protected. Concentrating on the most beneficial elements of the scheme to be made publicly available. We would not want to require detailed scheme information that could be read out of context and be counterproductive, for example, to be misinterpreted and prompt fears amongst members (and others) that the scheme is becoming unsound.
169. As the CMP market grows and our understanding of what is important to members, employers and other interested parties, we will keep the publication requirements under review and amend accordingly for what must be available for wider scrutiny, challenge and comparisons across schemes.
Question 17: Do you agree with the new publication requirements for CMP schemes?
Question 18: Outside of the statutory communications outlined in the draft regulations, are there any regular communications you expect to send out to members? Please consider deferred members and those in decumulation in your response.
Chapter 7: Member Protection and Transfers
170. The government has introduced a wide range of measures and is in the process of introducing further measures to protect the interests of pension scheme members. We want to ensure that members of CMP schemes also benefit from these protections as appropriate. The nature of CMP schemes and how we envisage single or connected employer schemes working will mean that some of the risks faced by members of individual defined contribution (IDC) schemes will not apply to CMP scheme members. This section of the consultation considers these measures and how we envisage they will or, as the case may be, will not apply to CMP schemes.
171. The government confirmed in its response to the 2018 “Delivering Defined Contribution Pension Schemes” consultation that it would introduce an annual charge cap set at 0.75% of the value of the whole CMP scheme fund, or an equivalent combination charge. It also confirmed that the cap would have the same scope as the IDC charge cap. The government also acknowledged in its response that the detail of how the charge cap is applied in CMP schemes will need adjustment to reflect the nature of pooled benefit provision rather than individual pots. With this in mind, we have tried to align our approach with that of the IDC charge cap as set out in the Occupational Pension Schemes (Charges and Governance) Regulations 2015.
172. Schedule 3 to the Pension Schemes Act 2021 (2021 Act) amended the Pensions Act 2014 to help clarify that regulations can be made under the powers in that Act to provide for controls on charges borne by members in CMP schemes. This includes implementing an appropriate charge cap in CMP schemes. Schedule 7 to the draft regulations makes amendments to the Charges and Governance Regulations 2015 to provide for a charge cap to apply to members of a CMP scheme used for automatic enrolment.
173. As CMP schemes will only have one arrangement or fund into which contributions will be paid, the need to identify a default arrangement does not apply. However, we are including the principle that once a scheme is subject to the charge cap that it will continue to be subject to the charge cap even though it stops being used for automatic enrolment purposes.
174. For example, a decision may be taken in the future to transfer active members to a different CMP section, which will be used to meet the employer’s automatic enrolment obligations. While the original scheme will stop being used for automatic enrolment purposes the deferred and pensioner members remaining in that scheme will continue to be subject to the charge cap because of this principle. In addition, amendments have been made to regulation 4 of the 2015 Regulations to provide for continuity of protection in certain circumstances when members are being transferred between relevant schemes. This aligns with the approach taken with the individual defined contribution charge cap but pensioner members who move to a scheme that is not a CMP scheme will not be covered by the CDC charge cap.
175. In line with the IDC charge cap, CMP schemes will be subject to the same types of permitted charge structures and equivalent methods of assessing compliance with the charge cap. The principal difference will be that charges will be levied collectively across the membership and similarly assessment of compliance will be across the whole of the scheme and not at member level.
176. As with the IDC charge cap, members of CMP schemes can opt-out of the charge cap if they meet the conditions set out in regulation 9 of the Charges and Governance Regulations 2015 (as amended by the draft regulations). These relate to an agreement the member may wish to enter into for advice or a service. Regulation 10 was introduced as a transitionary measure for the IDC charge cap so will not apply to CMP schemes as they will be new.
Question 19: Do you think the changes we are making to the Occupational Pension Schemes (Charges and Governance) Regulations 2015 (see provisions in Annex A) will implement the charge cap in CMP schemes and protect members in the way we intend?
177. The government is introducing measures designed to accommodate performance fees within the IDC charge cap. This includes allowing smoothing of performance fees, which may encourage IDC schemes to invest in less liquid assets, otherwise known as ‘productive finance’. As CMP schemes will have more potential to invest in more productive assets, we have sought to ensure that equivalent performance fee measures will also apply to CMP schemes.
178. Regulation 11 of the Charges and Governance Regulations 2015 is designed to tackle an unfair charging practice that existed in IDC schemes. This related to imposing charges on deferred members that were higher than those being levied on active members. Since all members in a CMP scheme will be subject to the same charges this regulation will not apply to CMP schemes.
Payments to advisers
179. Regulation 11A to 11C of the Charges and Governance Regulations 2015 concern the prohibition of charges on members that are related to a payment to an adviser or to recover a payment made to the adviser by a service provider. New schemes established after 6 April 2016 were banned from levying such charges on members. The regulations will ensure that this ban also applies to CMP schemes but where members in IDC schemes can opt-out of this ban in order to enter into such an arrangement with an advisor we will not be permitting this. This is an inappropriate legacy charging arrangement and the survey of charges in schemes used for automatic enrolment did not find these charges being used anymore.
Early exit charge cap
180. Regulations 13A to 13E of the Charges and Governance Regulations implemented a cap or ban on early exit charges. Such charges were deemed to be a potential barrier to people seeking to exit a scheme in order to access the pension flexibilities. The ban applies to schemes set up after the date the regulations came into force in 2017 and for existing schemes such charges were capped at one per cent. The regulations ensure that members of CMP schemes will also benefit from this ban.
De minimis on flat fees
181. The issue of flat fee charges eroding small pension pots has led to the Government’s intention to introduce a de minimis in relation to flat fee charges on pension pots that are worth less than a £100. While this will be an important protection for members who have small pots in IDC schemes, we do not envisage that a member’s share of the collective assets will be below £100. Consequently, we will not be applying this measure to members of CMP schemes but will continue to monitor this as the new market develops and will take action if needed.
182. The government has introduced measures and are in the process of introducing further measures to safeguard members of pension schemes from pension scams. Members of CMP schemes will also benefit from the ban on cold calling and tighter scheme registration rules that have been introduced. They will also be covered by the ‘transfer rights’ provisions that were introduced under section 125 of the 2021 Act. The regulations being made under this section will apply to members who transfer out of CMP schemes, giving them all the new protections, and will also designate authorised CMP schemes, alongside authorised master trusts, as schemes whose authorisation by the Pensions Regulator means transfers into them may be made safely, without the need for additional protections to be applied.
183. 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.
184. Members of CMP schemes who have not started to receive their pension income will have a statutory right to transfer to another pension scheme if they wish. Equally, a member can transfer into a CMP scheme as long as the trustees of the scheme have agreed to the transfer.
185. When a member submits a transfer request to the trustees of the CMP scheme, the trustees will have to provide the member with an estimate of the value of the member’s share of the collective assets at that point. As with the existing transfers process, scheme rules and regulations will set out how an individual’s share of the collective assets will be calculated, taking into account any valuation of scheme assets and any adjustments that have been made. This is to ensure that the calculation is fair and takes into account the interests of both the individual member and the remaining members in the scheme.
186. The notification containing that estimate will also advise the member that the transfer will not be facilitated for a three-week period without the written consent of the member to do so. The notification will advise that this ‘cooling off’ period is intended to provide the member time to consider whether it is in their best interests to transfer out of the scheme and outline the implications of leaving a CMP scheme before retirement. The primary purpose of a CMP scheme is to provide an income in retirement until death, not to provide a cash sum.
Chapter 8: Consequential Changes
187. We have identified a number of changes that need to be made to existing pensions legislation so that CMP schemes operate as intended. These changes are set out in a table in Annex C, with selected draft amendments in Annex D.
188. In our response to our 2018 consultation Delivering Collective Defined Contribution Pensions Schemes[footnote 9] we said we would look at applying a cost of accrual type test to CMP schemes. We will bring forward draft regulations later this year.
189. HM Revenue and Customs is also making necessary changes to tax legislation to allow this new type of pension provision[footnote 10].
Question 20: Are there any other amendments to existing legislation we should consider?
Summary of Questions
Chapter 1: Scope and Applications
Do the draft regulations make it clear to employers whether they are considered to be connected for the purpose of the legislation?
Are there any other characteristics that should be added to those that are already listed at regulation 4(1)?
Chapter 2: The Application Process
Do you agree with the proposed fee structure, taking into account schemes containing multiple CMP sections?
Chapter 3: The Criteria for Authorisation
Are there any significant practical barriers to schemes meeting these requirements?
Do the proposed gateway and ongoing tests provide a sensible measure of whether a scheme’s design is sound, at initial application and going forward?
What back-stop should be provided in regulations which would require a CMP scheme to wind up rather than close to further accruals? What might constitute suitable evidence to support this decision?
Do you think the regulations cover the appropriate matters that must be taken into account?
What are the financial costs required to set up the necessary systems and processes required to meet the communications criterion? Please outline any one-off and ongoing costs. This may include set up of IT platforms, data management or postal costs.
Considering the draft regulations and criteria for authorisation, could you estimate the costs of preparing the information required for authorisation? Please outline the extent and cost of external contractors where they may be required. This may include the cost of setting up IT platforms and infrastructure, actuarial support or additional staffing required to support the creation of scheme design and the planning of financial sustainability or triggering events. Please outline if there would there be any significant differences between DB and DC schemes.
Chapter 4: Valuation and Benefit Adjustment
Are the regulations clear about how valuation and benefit adjustment is to take place?
Chapter 5: On-going Supervision Framework
Do you think that the events listed in draft regulation 23 will provide the information the Regulator needs or are there other events that should be added?
Do you think that draft regulation 29 and schedule 6 meets the policy intent of providing a clear framework in which CMP schemes can be wound up and the interests of members protected?
What are the potential ongoing financial costs associated with ensuring the scheme continues to meet the ongoing supervision requirements? This may include the cost of ongoing actuarial support, communication costs and IT platforms.
What steps do you intend to carry out in order to monitor equality impacts on members over time?
Chapter 6: Publication and Disclosure of Information
Do you agree with the amendments made to the Disclosure Regulations for CMP schemes?
Are there any other areas within the Disclosure Regulations that you feel should be amended to take account of the unique collective design of CMP schemes?
Do you agree with the new publication requirements for CMP schemes?
Outside of the statutory communications outlined in the draft regulations, are there any regular communications you expect to send out to members? Please consider deferred members and those in decumulation in your response.
Chapter 7: Member Protection and Transfers
Do you think the changes we are making to the Occupational Pension Schemes (Charges and Governance) Regulations 2015 (see provisions in Annex A) will implement the charge cap in CMP schemes and protect members in the way we intend?
Chapter 8: Consequential Changes
Are there any other amendments to existing legislation we should consider?
Collective money purchase is the legislative term for collective defined contribution schemes where contributions into the scheme are pooled and invested with a view to delivering an aspired benefit level.
Collective Defined Contribution (“CDC”) schemes.
Pension Schemes Act 2021.
The main events that can affect a CDC scheme’s financial health are: (i) Asset returns that are different to those expected, or a change in future expected asset return, (ii) Mortality rates that are different to those expected, or a change in life expectancy, (iii) A change in the active member profile.
Events which may significantly impact the ability of the scheme to operate and which are listed in section 31 of the 2021 Act.
Continuity option 1 involves winding up the scheme, and it is envisaged that this could take some time.↩
Consultation: Simpler annual benefit statements: draft regulations and statutory guidance.↩
Reporting of cost charges and other information: guidance for trustees and managers of relevant occupational schemes.
Delivering Collective Defined Contribution Pensions Schemes.
Finance Bill 2021.
SOURCE: GOVT OF UK
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