DWP publishes consultation on new Draft Regulations for unconnected multiple employer CDC Schemes, Clive Pugh

DWP publishes consultation on new Draft Regulations for unconnected multiple employer CDC Schemes

With the Royal Mail Collective DC scheme launched in early October, it feels like an exciting time for the future of Collective DC pension schemes (“CDC schemes”). Following up on its promise to extend CDC schemes to multi-employer structures, the DWP published its consultation paper on 8 October seeking industry feedback on its proposed draft Occupational Pension Schemes (Collective Money Purchase Schemes) (Extension to Unconnected Multiple Employer Schemes and Miscellaneous Provisions) Regulations 2025 (the “Draft Regulations”). A title that does not roll easily off the tongue!

The Draft Regulations are an important milestone in the development of CDC schemes as a viable pensions offering. How have we got here and what do the Draft Regulations do?

The case for CDC Schemes

As suggested by the name, CDC schemes are basically a collective defined contribution pension scheme into which an employer and employee both make fixed contributions. The fund is managed collectively, unlike in defined contribution schemes where people build up their own pension pots. The scheme pools the funds together with other members of all ages, allowing more headroom for higher-risk investment strategies, which should result in higher-returns for members on average in comparison to individual DC schemes. CDC scheme design aims to provide retirement funds with a target pension but the employer does not guarantee the pensions paid by the scheme and therefore there is the potential for members’ pensions to be increased or decreased (which is one of the key risks for members of a CDC scheme).

The appeal of CDC schemes is that they are intended to provide members with regular income for life that is stable yet still able to benefit from economies of scale, without the need to make complex financial decisions about their pension investments.

With similar structures already established in the Netherlands and Canada, the balance of predictability and potential growth afforded by CDC schemes have ignited the government’s interest in implementing this pension model in the UK.

CDC - the story so far

The Pension Schemes Act 2021 and subsequent secondary legislation introduced the legislative framework to establish single or connected employer CDC schemes in the UK. This paved the way for the launch of the Royal Mail Collective Pension Plan - the UK’s first CDC scheme.

Following a 2023 consultation on “Extending opportunities for collective defined contribution schemes”, the Government response acknowledged that there was a strong appetite for broadening the CDC regime to multi-employer schemes and decumulation only schemes. So far, CDC schemes have only been a viable option for a handful of the largest employers. However, this Consultation on the Draft Regulations for unconnected multiple employer CDC schemes aims to allow greater accessibility for the wider market to participate in CDC schemes. This would be an important step in the development of CDC as it opens up CDC to commercial providers, including master trusts. Until now, CDC has perhaps not been seriously considered as a viable alternative to DB and DC schemes but it is hoped this will change with the Draft Regulations.

The Draft Regulations

The overarching themes from the Consultation and the Draft Regulations relate to changes to risk pooling, further authorisation requirements, stringent regulatory oversight to mitigate against risks of mis-selling and cross-subsidising, as well as ensuring the financial sustainability of unconnected multi-employer CDC schemes. Some of the key regulatory points covered in the Draft Regulations are as follows:-

Trigger for sectionalisation – if a CDC scheme’s benefits provided each year has materially different accrual rates or materially different expected adjustments to those rates as a result of a change in investment strategy, this will trigger the requirement for the scheme to open a new section that would only apply to unconnected multiple employer CDC schemes. The policy intention behind this is to lower the risk of cross-subsidising and ensure parity across members. The regulations recognise that unconnected employer CDC schemes will need to cater for different contribution and accrual rates. A scheme may therefore operate as a single section except where there are materially different accrual rates of adjustments due to changes in the scheme’s investment strategy.
Introduction of a “scheme proprietor” – the Draft Regulations introduce the role of the scheme proprietor in order to clearly establish who is responsible for the business strategy and financing the scheme. A scheme proprietor must satisfy certain criteria in relation to various responsibilities and liabilities – for example, they cannot be a trustee.
Scheme design tests – it is proposed that certain scheme design tests must be met in order for an unconnected CDC schemes to be authorised. Trustees must prepare a viability report explaining the design of the scheme and that a scheme actuary is involved to advise on the soundness of the scheme where required. A statement must also be prepared by the scheme proprietor confirming the viability report. The consultation paper acknowledges that the interpretation of “sound” may be open to interpretation, but that it is underpinned by the policy intention to eliminate poorly designed schemes that could contribute to intergenerational unfairness. Whether or not a scheme is “sound” is assessed at its initial application for authorisation as well as on an ongoing basis to the Pensions Regulator (TPR). It will be interesting to see whether an explanation of what is “sound” will be covered in more detail in the updated Code of Practice.
Promotion and marketing – in order to mitigate risks of mis-selling, upon authorisation, the schemes must ensure that any misleading promotion or marketing must be rectified and they must demonstrate that robust marketing systems are in place so that all communications accurately reflect the scheme’s offerings. Additionally, the Draft Regulations are clear that the responsibility for promotion and marketing lies with the scheme proprietor, rather than the trustee.

What’s next?

The consultation only covers “whole life” CDC schemes (i.e. providing members with a full savings to retirement member journey). The consultation does not include the option for providers to offer decumulation-only CDC, but the DWP has asked stakeholders that are developing trust-based decumulation-only CDC options to come forward and share insights into achieving scale, promotion and marketing and entry pricing, suggesting that decumulation-only specific legislation is still on the horizon. We understand that decumulation will be a focus of Phase 2 of the Government’s pensions ecosystem review and so that may serve to drive forward any CDC specific development in this area.

The consultation closes on 19 November 2024 and there is a considerable amount of detail for industry to digest. It is expected that the Draft Regulations will be laid in Parliament in 2025. Subject to parliamentary approval, the government intends to bring that legislation and an updated TPR’s CDC Code to support the CDC regulatory framework into force as soon as it is practicable to do so.

Once the Draft Regulations are finalised and brought into force, unconnected multiple employer CDC schemes will then be able to seek authorisation from TPR to operate which will potentially mark another important landmark in the development of CDC schemes as a possible alternative to existing DB and DC scheme structures.

This article was co-written by Anousha Al-Masud, Jack Gillions and Clive Pugh.