The advent of CDC in the UK
Authorisation plans for Collective Defined Contribution (CDC) schemes start to take shape.
The Pensions Regulator has recently consulted on a new Code of Practice on authorisation and supervision of collective defined contribution schemes, in advance of the relevant regulations coming into force on 1 August 2022.
The Pension Schemes Act 2021 sets out the legislative framework for CDC schemes, described in legislation as Collective Money Purchase schemes. Authorisation and supervisory arrangements for CDC schemes are implemented by the Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2022.
The ICAS Pensions Panel has responded to TPR’s CDC Code of Practice consultation.
What is a CDC scheme?
CDC schemes set a target level of retirement income which can be adjusted periodically in accordance with the scheme rules. The target level of income set by a scheme is not guaranteed but through risk sharing across the membership of the scheme, CDC schemes are designed to provide higher benefits than a traditional Defined Contribution (DC) scheme.
Retirement benefits are paid from available scheme assets arising from the investment of employer and employee contributions paid into the scheme. No funding deficit can arise in a CDC scheme, meaning that employers will not have to make catch up payments. This is a key difference from a Defined Benefit (DB) scheme.
While CDC schemes will be new to the UK, these operate in other countries including the Netherlands, Denmark and Canada.
Can any employer participate in a CDC scheme?
A CDC can be established under an irrevocable trust by an employer and can be used by a single employer, or two or more connected employers. Under the regulations as they stand, CDC schemes cannot be established as multi-employer schemes.
In practical terms, only large employers will be in a position to establish a CDC scheme and employers connected to them will be able to participate.
Employers are connected if they are group undertakings in relation to each other as defined in company law or are structured so that the economic position of the shareholders of each company is the same as if they held shares in a single company that makes up the combined business.
The Department of Work and Pensions (DWP) has already started work on extending the CDC model to unconnected (non-associated employers) so multi-employer CDC schemes should be possible in the future.
The Royal Mail is expected to provide the first CDC in the UK.
TPR is responsible for the authorisation and supervision of CDC schemes and the draft Code of Practice sets out detailed requirements for the process for applying for authorisation as well as details of the authorisation criteria that need to be met in order for a CDC scheme to operate. A scheme must meet all the authorisation criteria to operate in the market.
The authorisation criteria aim to ensure that only fit and proper persons are involved in key roles relating to a CDC scheme, that the design of the scheme is sound and complies with the legislative requirements, and that the scheme has sufficient financial resources to meet the costs of setting up and running the scheme and to take the necessary steps if things go wrong.
Although not referred to in the draft Code of Practice, a CDC scheme must be a qualifying scheme for automatic enrolment purposes.
Participating employers providing support
Where a participating employer is to provide support for a CDC scheme’s ongoing costs or financial reserves, specific information about the employer’s finances must be provided as part of the application process. This includes forecasts, budgets and historic financial information, the employer’s most recent annual financial statements and the financial statements of any third party providing material financial support to the employer.
Support for a scheme’s ongoing costs or financial reserves is separate from the contributions an employer makes on behalf employees towards their retirement benefits.
Following authorisation of a CDC scheme, TPR will supervise the scheme to ensure that it continues to meet the authorisation criteria. Failure to do so may result in the withdrawal of authorisation.
Completion of a supervisory return will be a key mechanism used by TPR to ensure that a scheme continues to meet the authorisation criteria. The draft Code of Practice does not set out how often TPR intends to ask schemes to submit a return but it cannot ask a scheme to do so more than once in a 12 month period. The regulations place an emphasis on schemes demonstrating, through the supervisory return, that its trustees remain competent to run the scheme.
There is an obligation placed on various persons, including scheme trustees and those giving actuarial, financial or legal advice to the scheme to report significant events to TPR.
The statutory obligation to report protects advisers from breaching client confidentiality in making a report. Legally privileged information is outside the scope of the statutory obligation to report.
Failure to report a significant event could result in a civil penalty.
A lengthy list of significant events is set out in the regulations. The list includes:
- Changes to the trustee body (or to others required to be fit and proper persons in relation to the scheme).
- Circumstances where a member of the trustee body (or others required to meet the fit and proper person test) may have ceased to meet the test.
- Significant changes in the scheme’s investment strategy.
- The scheme being unable to meet its running costs.
A sub-set of significant events are described in the regulations as ‘specified significant events’, for example, a significant change in the scheme’s investment strategy. For such events, the regulations specify the particular facts to be reported.
TPR may issue a risk notice to the trustees of a CDC scheme if it considers:
- There is an issue of concern in relation to the scheme, and
- The scheme will breach the authorisation criteria, or is likely to breach the criteria, if the issue is not resolved.
The trustees of a CDC scheme issued with a risk notice must prepare a resolution plan for agreement with TPR and prepare progress reports as specified.
Read the ICAS Pensions Panel response to TPR’s CDC Code of Practice consultation.