Extending opportunities for collective defined contribution pension schemes

On July 21, 2023, the Department for Work & Pensions (DWP) published a response paper in relation to its consultation which was launched in January 2023 to
(a) expand the opportunities of collective defined contribution (CDC) pension schemes to cover multiple employer schemes, where multiple employers join together to create a single pension fund to share administrative costs and gain bargaining powers; and
(b) sort out options of CDC pension schemes for expanding the range of products and services offered by them so that they can provide their members with both savings options and payout (decumulation) options in the event of retirement (please see EventID 19522 in this context for more information).
In this response paper now, the DWP briefly outlines the responses it has received to its consultation, discusses its stance on the issues, and the way forward in this matter.
#### Background
In view of industry feedback indicating a strong preference for „whole-life“ multiple employer defined contribution pension schemes compared to single employer schemes, not least driven by changing demographics and the trend towards multiple employments, the DWP launched a consultation early this year in which it discussed its intention to set up a regulatory framework for multiple employer schemes and its intention to expand the range of products offered by CDC pension schemes to cover a member’s entire employment lifecycle, from active employment to retirement.
As part of this consideration, the DWP sought input on various aspects of introducing multi-employer CDC schemes such as
– the definition of key principles that should govern multi-employer CDC schemes, such as being trust-based, requiring authorization, or adhering to a 0.75% charge cap.
– the imposition of specific requirements on scheme trustees, managers, promoters, and other relevant persons, such as criteria for their fitness and propriety.
– the imposition of regulations related to marketing these CDC pension schemes.
– the design of an accountability framework for multi-employer CDC schemes, particularly in terms of financial resources and continuity, possibly through the implementation of a scheme funder requirement.
– the imposition of disclosure requirements for CDC schemes and definition of the annual valuation procedures to adjust benefits based on scheme assets and assumed withdrawals.
#### Comments
As expected, the DWP received much feedback from various stakeholders, including pension fund managers, pension scheme members, trade associations, consultancy firms, and many others. The remarks of respondents are briefly summarized below. Please note that the summary is far from complete, only containing key points mentioned by commenters. For detailed, comprehensive information, please refer to the original response paper.
(1) Comments on the noted key principles:
Most respondents generally supported the principles outlined in Chapter 3 of the consultation. However, there were mixed views of respondents on the question of whether or not multi-employer CDC pension schemes should be trust-based only. In fact, three respondents expressed concerns about this approach, with one respondent suggesting to develop a regulatory framework that accommodates both trust-based and contract-based CDC schemes. Furthermore, several commenters noted that the DWP should not develop „trust-based decumulation only CDC schemes“ and that multi-employer CDC schemes should also be subject to the Value for Money requirements.
(2) Comments on specific competency requirements on scheme trustees, managers, promoters, and other relevant persons:
Most respondents agreed that in relation to new CDC designs, fit and proper requirements should be imposed, particularly with respect to persons performing specific functions within such multi-employer CDC pension schemes. However, some respondents noted that there are key differences between commercial and sectoral schemes, which is why the requirements should be tailored. Furthermore, most commenters noted that roles in trust-based schemes such as ’scheme strategist‘ and ’scheme funder‘ are translatable to multi-employer CDC schemes. Therefore, the Master Trusts Regulations 2018 should serve as a blueprint for considering the new roles and relationships inherent in multi-employer CDC schemes. As far as the fit and proper test for marketing and promotion personnel is concerned, most respondents favored such „testing“.
(3) Comments on disclosure requirements:
As far as disclosure requirements of CDC schemes are concerned, there were only few comments. It was clear that the disclosures made to scheme members must be made on a regular basis, particularly those relating to scheme charges. In that regard, it may be useful to simply transpose the requirements currently set out for single employer CDC schemes to those with multiple employers.
(4) Comments on valuation and adjustment of benefits:
As far as the opinions of respondents regarding the valuation and adjustments of benefits requirements for whole-life multi-employer pension schemes are concerned, there was a broad consensus on applying consistent valuation methodologies and benefit adjustments for all members while ensuring fairness and equal treatment across different groups of scheme members. In this context, most commenters noted that those requirements imposed on single or connected employers schemes could be transposed on multi-employer CDC pension schemes as well.
#### The DWP’s proposed way forward
Having reviewed the feedback, the DWP finds that it will proceed as proposed and extend current CDC provisions for single or related employer pension schemes to multi-employer schemes only with targeted adjustments. This can lead not only to significant benefits for savers, but to the broader economy as well. By pooling investment and longevity risks, trustees can invest for longer periods in growth-focused assets like equities, aiding in infrastructure and technology investment. The DWP will soon draft and consult on corresponding legislative amendments.
Also, the DWP will address scenarios where a multi-annual reduction is initiated due to poor investment performance but is followed by a positive rebound and will amend regulations to allow the transfer of accrued rights of dependents and survivors to a flexi-access drawdown arrangement during the wind-up of a CDC scheme.
Lastly, the DWP plans to introduce CDC decumulation-only products. These products would offer members of traditional individual DC schemes a more cost-effective way to convert their pension pot into income, potentially leading to improved outcomes on average.