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The Pension Schemes Act 2021 introduced a new type of pension scheme known as a collective money purchase scheme (CMP), otherwise known as a collective defined contribution scheme (CDC). The Government has kept the ball rolling by starting a consultation on the regulations providing the detailed framework for this sort of scheme.
As a brief reminder, CMP schemes operate in a similar way to conventional defined contribution schemes but members own a proportionate share of the overall scheme assets rather than having their own pot. Investment and longevity risks are borne by the whole membership, rather than individual members, allowing the scheme to remain invested in higher-risk assets. This approach is anticipated to produce better outcomes for members than a conventional defined contribution scheme. There are target benefits but, unlike in a defined benefit scheme, income in retirement is not guaranteed and may fluctuate as adjustments are made due to changes in investment performance and other risk factors.
The Pension Schemes Act 2021 (the Act) sets out the initial legal framework for introducing CMP schemes. The draft regulations will add much-needed detail to the provisions contained in the Act, providing a more substantial framework for the operation of CMP schemes and governing the relationship with the Pensions Regulator.
Currently, a CMP scheme can only be operated by either one sole employer or by two or more connected employers. The draft regulations have provided further detail around when employers are considered connected, which includes joint ventures, employers who employ the same employees (i.e. in a split contract scenario) and where employers are part of the same group.
This position is likely to change in the future as the Act specifically allows the DWP to open up CMPs to non-connected employers. The Pensions Minister was clear in the foreword to the consultation that the Government will look at developing CMPs for non-connected employers once the framework under consultation has bedded in. The fact that Royal Mail and the Communication Workers Union are already committed to a CMP scheme has pushed the connected employer framework forward but the Government wanted to consult further before allowing non-connected employer schemes. Apparently, regulations for non-connected CMP schemes might be published in 2022.
However, given the authorisation requirements, it may well be that many employers will await the development of non-connected employer schemes and the possible entry into the market of master trusts and commercial providers before taking the plunge into a CMP scheme.
Dividing schemes into sections
Some pension schemes can be split into various sections, with each section offering different benefits.
The draft regulations provide that a CMP scheme that is sectionalised (i.e. split into sections) must obtain new authorisation for each new section unless the following characteristics are the same as the original, undivided scheme:
- Rate of accrual of benefits;
- Rate or amount of employer and employee contributions; and
- Normal pension age.
Given the costs of authorisation, it seems unlikely that many CMP schemes will have multiple sections, at least initially.
Authorisation from the Regulator
The authorisation regime is similar but not identical to the authorisation regime for master trusts. There will be a fixed fee for authorisation, which is likely to be between £50,000 and £120,000. This is significantly more than the fee for master trust authorisation which may reflect the significant engagement with the Pensions Regulator required to obtain authorisation.
The draft regulations set out the information which must be provided as part of an application for authorisation, which includes details about the scheme itself and the trustees who will run the scheme.
There will be a requirement for anyone taking part in the running of the CMP scheme to be a 'fit and proper person'. The Regulator will look at a person’s competence, conduct and integrity when determining whether someone is 'fit and proper'.
Additional guidance on the authorisation requirements will be published by the Pensions Regulator alongside its new code. This will give employers a better understanding of exactly what the Pensions Regulator will be looking for when reviewing an authorisation application.
Valuation and benefit adjustment
A key feature of CMP schemes is that scheme trustees can continue using higher-risk investment strategies with a view to receiving a higher return. This could mean an increase in the scheme’s assets and could in turn mean members’ benefits increase over time. But, conversely, if the scheme was to lose money in investments, then benefits could reduce.
The draft regulations provide that any adjustments to benefits, whether positive or negative, must be made equally and in a way that does not favour any particular group of members over another.
The Regulator will continue to supervise authorised CMP schemes following authorisation. The draft regulations provide additional details as to what the supervision will look like. This includes a new power granted to the Regulator, allowing it to issue risk notices where it is concerned the scheme may be at risk of no longer meeting the criteria to be authorised. Where a risk notice is used, scheme trustees will have 14 days to respond. Under the draft regulations, trustees can then either submit an implementation strategy to the Regulator, setting out how the scheme members’ interests will be protected, or pursue one of three continuity options, which includes the options to close the scheme or to wind up the scheme.
Information disclosure requirements
As the benefits paid by CMP schemes can go up as well as down, the draft regulations introduce additional requirements on trustees to keep members informed about their benefits. This includes requirements to send all members an annual benefit statement, sending annual notifications to pensioner members at least two months before any adjustments are made to their benefits, and notifying all members and beneficiaries where benefit adjustments have been incorrectly applied.
For more information
The DWP’s consultation on the new regulations will close on 31 August 2021. If you have any queries about the draft regulations or want to explore the option of setting up a CMP scheme, please do not hesitate to contact Doug Mullen.
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