The Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2021
The DWP is consulting on 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, under the provisions of the Pension Schemes Act 2021 (“PSA21”).
In this response
We welcome the opportunity to respond to this consultation.
We have not sought to answer every question in the consultation but have limited our responses to those areas which are pertinent to our practice.
Question 1: Do the draft regulations make it clear to employers whether they are considered to be connected for the purpose of the legislation?
We agree that the draft regulations make it clear to employers whether they are considered to be connected for the purpose of the legislation. We note that draft regulation 3 is identical to regulation 3 of the Occupational Pension Schemes (Master Trusts) Regulations 2018 (the “Master Trust Regulations”). We agree with this approach and think it would be helpful to keep concepts and definitions broadly the same across the CMP regime and the master trust regime, where appropriate, since the industry is already familiar with the latter.
Question 2: Are there any other characteristics that should be added to those that are already listed at regulation 4(1)?
The characteristics listed at regulation 4(1) appear to be comprehensive and we do not consider there are any other characteristics that should be added.
Question 3: Do you agree with the proposed fee structure, taking into account schemes containing multiple CMP sections?
Whilst we acknowledge that the exact amount of the application fee is still to be agreed, we think that the proposed maximum level of the fee at £120,000 is high, especially given the likely high set up costs for a CMP scheme. We are concerned that fees at this level might deter employers from setting up a CMP scheme.
The DWP acknowledge that this will be higher than the fee that applies in the master trust regime, and that “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”. It would be helpful to explain how the proposed range of figures for the authorisation fee has been calculated.
We agree with the proposed approach that the Regulator has discretion to determine the fee where a section of a scheme is already authorised or where no other sections of the scheme are yet authorised and applications are made in respect of multiple sections.
It would be helpful if future guidance could contain further detail on how the fee will be decided, with illustrative examples.
Also, it is not clear whether there will be one flat fee amount which applies to all CMP schemes or whether there will there be a range of fees, for example, depending on the size of scheme?
Question 4: Are there any significant practical barriers to schemes meeting these requirements?
Whilst we appreciate the policy intent to apply “appropriate scrutiny” to CMP schemes, we are concerned that the proposed criteria for authorisation set a very high bar and this might deter employers from setting up a CMP scheme. In our view, the bar may not need to be as high as it is for the master trust regime, particularly for single or connected employer CMP schemes, given a CMP scheme is more akin to a DC occupational scheme.
It would be helpful if future guidance could contain further detail on the criteria for authorisation.
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?
We note that, by virtue of section 5 of the PSA21, 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. Where a CMP scheme is divided into separate CMP sections, will it be possible for those sections to undergo the ongoing tests at the same time, regardless of when the section became authorised? It would be helpful if this was the case.
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?
We understand that, as with the master trust regime, if a triggering event occurs then a decision can be taken at that point to determine to wind up the scheme and in certain cases wind up must be pursued as required by the Regulator. This appears to be an appropriate and sufficient mechanism so we are unclear why additional backstops would be required.
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?
In our view, the events listed in draft regulation 23 are comprehensive.
We note that the draft regulation 23 is similar to regulation 14 of the Master Trust Regulations (but adapted to be appropriate to CMP schemes) which we think is helpful for the reason mentioned in our answer to question 1 above.
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?
The DWP suggest that the “default discharge option” might be a “master trust or a receiving scheme that the employer has established for their employees to be transferred into”. We are concerned how this could work in practice without a reciprocal requirement on master trusts to accept a transfer of benefits from a CMP scheme. At the moment, master trusts will not accept a transfer of benefits which are not pure money purchase. Whilst we understand CMP schemes are intended to be a “new form of money purchase occupational pension provision”, a master trust may be unwilling to accept a transfer from a CMP scheme where the nature of the benefits is fundamentally different to that provided by other money purchase schemes. This is a similar issue to the existing issue of master trusts accepting a transfer of benefits from hybrid arrangements and DC schemes which have links to DB benefits (as well as AVC arrangements).
Also, schedule 6 para 2(a) refers to transferring benefits to an occupational pension scheme “where an employer in relation to the transferring scheme is, or is connected with, a controlling employer or a principal employer of the receiving scheme”. However, in a situation where the transferring CMP scheme was to wind up and therefore no future benefits would be accrued, the employer in relation to that transferring CMP scheme would not participate in, or be connected to a participating employer in, the receiving scheme.
There is also reference in the regulations to the option to transfer members into a flexi-access drawdown fund (“FADF”). We are not clear if the intention here is to limit this to FADFs in master trusts or to provide the option to transfer to a FADF in eg a personal pension scheme or a SIPP (which, currently would require member consent under the preservation regulations). Also, if a member is not yet over age 55, we are unclear how a member could transfer to a FADF.
We think that the Regulator’s guidance will need to clarify a number of points around the proposals for securing benefits on a wind up of a CMP scheme and drafting changes to the legislation are likely.
Question 15: Do you agree with the amendments made to the Disclosure Regulations for CMP schemes?
The proposed approach of amending the existing disclosure requirements may be difficult for schemes in practice. We would suggest that it would be more appropriate to address the disclosure requirements for CMP schemes separately given the different nature of the benefits to a classic DC occupational pension scheme, for example in a separate schedule, rather than integrating them into the existing disclosure requirements for money purchase schemes. In our view, this would facilitate the delivery of the “important key message that CMP benefits can fluctuate”, enabling greater prominence on this message 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).
Addressing the disclosure requirements for CMP schemes separately would also mean trustees of classic DC occupational pension schemes do not need to concern themselves with the separate requirements applying to CMP schemes and avoid the risk of confusion regarding which requirements apply to which type of scheme.
Also, it is not clear how the proposed amendments to the Disclosure Regulations fit with the wider changes to the disclosure requirements being proposed around the “Stronger Nudge” to pensions guidance (which presumably will not apply to CMP schemes unless a member chooses to transfer their benefits elsewhere to access flexibilities). The DWP consultation on this “Stronger Nudge” is open and it is possible further amendments to the Disclosure Regulations might be needed based on responses to that consultation. We would be supportive of the Government considering these changes holistically to ensure that the proposals dovetail. This is another reason why it might be more appropriate to address the disclosure requirements for CMP schemes in a separate schedule.
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?
It appears no amendment is suggested to the current disclosure requirements around lifestyling under regulation 6(1) and Part 3 to Schedule 2, Disclosure Regulations. We understand that where no amendment is suggested, and the regulations apply to money purchase schemes, the DWP believe these should still equally apply to CMP schemes. Whilst there may be some form of lifestyling in CMP schemes we are not sure if it would work in the same way (ie the onus will not be on the member to select a lifestyling option and choose a target retirement age) so we suggest this area of the Disclosure Regulations may need amending.
Question 17: Do you agree with the new publication requirements for CMP schemes?
We understand the DWP’s intention is that the “additional publications requirements” apply in addition to the existing publication requirements for other money purchase schemes under regulation 29A of the Disclosure Regulations.
Whilst we appreciate that CMP schemes are money purchase schemes, they are fundamentally different in nature to other money purchase schemes and therefore there are certain existing publication requirements which perhaps should not apply to CMP schemes. For example, the requirement to publish an annual statement regarding governance (the Chair’s statement) under paragraph 34 of Part 5 to Schedule 3, Disclosure Regulations. Since members of CMP schemes do not have any control over the investments it is arguable that they do not need the same level of disclosure about net returns and costs and charges of investment funds, as members of classic DC occupational pension schemes.
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?
In the Foreword by the Minister for Pensions and Financial Inclusion, Guy Opperman notes that CMP schemes “have greater potential than individual defined contribution schemes to invest in illiquid assets such as infrastructure.”
However, we are concerned that the way the DWP intends to implement the charge cap in CMP schemes might limit CMP schemes’ ability to invest in a more diverse range of long-term assets, including illiquid products such as venture capital and green infrastructure and thereby prohibit decent returns.
Also, paragraph 176 of the consultation states that members of CMP schemes can “opt-out of the charge cap” if they meet certain conditions. This suggests an element of investment choice is possible, but this seems to run contrary to the whole principle of CMP schemes and is at odds with their collective nature.
Question 20: Are there any other amendments to existing legislation we should consider?
Whilst we appreciate the DWP’s intention is for CMP schemes to “sit clearly within the Money Purchase provisions of existing legislation”, in practice, the benefits provided by CMP schemes are fundamentally different to the benefits provided by other money purchase schemes. Therefore, we are concerned that not all the money purchase provisions of existing legislation make sense to apply to CMP schemes. For example, the requirement to publish a Chair’s statement (see our answer to question 17 above).
We note that, former Pensions Minister, Steve Webb’s plans around defined ambition proposed to make many more amendments to existing legislation, recognising that defined ambition schemes were fundamentally different to existing DC and DB occupational pension schemes. Whilst CMP schemes are not intended to be as different as defined ambition schemes were intended to be, we are concerned that trying to fit CMP schemes into the money purchase provisions of existing legislation may not work well in practice. As we mentioned in our answer to question 15 above, it may be more appropriate and easier if CMP schemes were addressed separately.