Consultation outcome

Government response to the consultation on draft regulations to support Part 1 of the Pension Schemes Act 2021 and associated consequential changes

Updated 17 January 2022

Foreword by the Minister for Pensions and Financial Inclusion

This is the culmination of four years’ worth of work: Collective Defined Contribution (CDC) pensions have been a project of mine since I became the Minister for Pensions in 2017. Consequently, I am delighted to publish the Government’s response to our consultation on draft regulations for single and connected employer CDC pension schemes.

These regulations will be a huge step forward in providing a major enhancement to the existing occupational pensions landscape and a third way forward between traditional defined benefit and post 2012 defined contribution schemes. By allowing pension scheme members to share investment and longevity risk, and by ensuring that employers have predictable pension costs, CDC schemes will mean scheme members can be confident of an income in retirement that, whilst not guaranteed, will provide them with good value from the contributions they and their employer have made.

This is also great news for Royal Mail, the Communication Workers Union and Royal Mail employees who deserve credit for their confidence in CDC and their commitment to breaking new ground jointly to find a way of providing members with the prospect of a better income in retirement.

I am grateful to those organisations who responded to our consultation. I’m pleased that the responses were positive and welcomed the regulations as providing assurance to both members and employers that these new schemes will be well designed and well run.

When I launched the July consultation, I said that these regulations would be only a job half done and that we wanted to expand CDC further. I am greatly encouraged by the number of consultation responses which indicated a real desire to extend the benefits of CDC to more employers and their workers. Whilst our prime focus remains on ensuring CDC is available from next year for single or connected employer schemes, we have already begun engagement with interested parties to understand their proposals for multi-employer schemes and explore how CDC can best be used to help deliver good outcomes for more of tomorrow’s pensioners.

Guy Opperman MP
Minister for Pensions and Financial Inclusion

Chapter 1 Background and Summary

About this Government Response

1. This document forms the government’s response to a consultation on the draft Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations, which ran from 19 July to 31 August 2021.

2. The consultation sought views on the draft regulations and associated consequential changes needed to implement single or connected employer Collective Money Purchase (“CMP”) schemes. We received 33 responses to the consultation and a full list of the respondents can be found at Annex C.

3. This document sets out:

• a summary of the comments received and the government’s response
• the final draft of the Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations, which we plan to lay in Parliament in December 2021
• the final draft of the Occupational Pension Schemes (Collective Money Purchase Schemes) (Modifications and Consequential and Miscellaneous Amendments) Regulations, which we plan to lay in Parliament in February 2022

4. This document only covers areas where responses were received including some changes that were made to the draft regulations as a result of points raised. It does not cover all the minor and technical changes we have made relating to formatting or to make the policy intent clearer.

5. This policy applies to Great Britain. It is envisaged Northern Ireland will make corresponding regulations to ensure a common approach across the United Kingdom.

Chapter 2 Scope and Applications

Consultation responses

Definition of connected employers - regulation 3

Q1: Do the draft regulations make it clear to employers whether they are considered to be connected for the purpose of the legislation?

6. There were 25 responses to this question. Of these, 10 respondents thought the definition was appropriate and clear. Several respondents were interested in broadening the definition to accommodate unconnected multi-employer sector wide schemes, with one respondent expressing the opinion that the definition already accommodated such schemes.

7. Other respondents found the definition unclear and sought clarity on a number of areas relating to the reference to ‘joint ventures’ in the definition including when members transfer between connected employers and TUPE transfers.

…..Regulation 3(1)(e) provides that employers are connected if they are or have been in a joint venture with each other. It is not clear whether this wording captures the situation where a joint venture is entered into between two or more companies, a CMP scheme is used for employees of the joint venture, and one or more of the entities whose employees participate in the scheme is a subsidiary of a party to the joint venture but not actually a party to the joint venture itself. This situation commonly arises where large corporate groups enter into joint ventures – the joint venture participants will typically be parent companies without employees, whereas the actual employers will be operating subsidiaries which are not party to the joint venture agreement…..

8. Three respondents expressed concern that there was no explicit provision preventing an existing defined benefit (DB) scheme, which may face a deficit, from re-characterising itself as a CMP scheme.

9. A further two respondents considered that there was a drafting issue with the definition of employer at draft regulation 3(1)(a) and the definition used in section 49(1) of the 2021 Act.

Government response

Connected employer definition

10. We are grateful for the feedback we received on the proposed definition of connected employers, which we have considered carefully. The policy intention is for the draft regulations to make provision only for single or connected employers to establish CMP schemes at this stage. We are continuing to hold discussions with interested parties about how CMP provision can be extended more widely including to unconnected multi-employer schemes.

11. Once there is clarity about what these parties want to achieve and how they intend delivering this, we can work with interested parties to arrive at a consensus on what a potential legislative framework for these schemes might look like. It will be important to learn from the lessons of operating single or connected CMP schemes in live running as well as carefully consider any potential risks that may arise in extending this provision.

12. In this context and in the light of those respondents who found the existing connected employer definition unclear, we have re-drafted the definition to target more clearly single or connected employers in line with the policy intent. We also consider that the re-draft will mitigate the confusion that seemed to arise from the use of ‘joint venture’ as well as the transfer of active members between connected employers.

13. We also understand the concern around the re-characterisation risk that was raised, and our proposed solution is covered in the consequential changes section.

14. We have also removed the definition of employer from the draft regulation so that the definition of employer in section 49(1) of the 2021 Act will apply instead. While some respondents thought that it might be better to use an existing definition of participating employer from elsewhere in pensions legislation, we consider that this might be more appropriate in the context of non-connected employers so will take this into consideration in the work that is underway to consider how this new provision can be extended to unconnected multi-employer schemes.

Consultation responses

Qualifying schemes and CMP schemes divided into sections - regulations 4 and 5

Q2: Are there any other characteristics that should be added to those that are already listed at regulation 4(1)?

15. There were 27 responses to this question. One respondent did not provide any comment and seven agreed with our approach with some of them suggesting changes.

16. Around half of the respondents, however, strongly thought that draft regulation 4 should be changed to permit the use of different characteristics in a CMP scheme without the need to open a new section. Some of these respondents suggested that draft regulation 4, as currently drafted, could stifle innovation, limit the extension of CMP provision and may put off potential sponsors interested in this new provision.

We would strongly caution against the proposed restriction, which would appear to prevent single section CMPs being able to implement age dependent accrual rates and contribution structures, particularly ones that have a uniform contribution rate for all active members. Based on our regular interactions on CMP with a large number of high-profile multi-employer/industry wide groups we are confident that this will be a required plan design feature for many potential sponsors…….

17. Two respondents suggested that it might be better to aggregate draft regulations 4(1)(b) and (c) so that the prescribed characteristic is the total combined rate of employer and employee contributions.

18. Another respondent suggested it might be beneficial to add ‘including the payment of a pension or other benefits under the scheme’ after ‘qualifying benefits’ in draft regulation 4(1)(a)” but also said no other characteristics needed to be added.

Government response

Qualifying schemes and sections

19. We are pleased that some respondents agreed with our approach. We also welcome the interest shown in extending CMP provision more widely. As previously explained, the policy intention behind these draft regulations and our approach has been focused on enabling single or connected employer CMP schemes to be established.

20. As stated earlier, we are committed to working with interested parties on how CMP provision can be extended. As part of that work, we will inevitably need to consider the ideas suggested by many respondents around permitting variation in the benefit characteristics in a CMP scheme without the need for opening a new section. For these reasons we do not think it is appropriate to make changes to the draft regulations at this stage.

21. In response to the suggestion that we aggregate the characteristics concerning the rate or amount of employer and employee contributions, we understand why it has been proposed. However, we are mindful that might enable an unscrupulous employer to reduce their rate of contribution whilst correspondingly increasing the rate of member contributions. We want to avoid this potential risk which could be to the detriment of members. We, therefore, do not propose amending the draft regulation as suggested.

22. On the last suggestion, we understand that the concern underpinning this is the use of ‘accrue’ in draft regulation 4(1)(a). This might be interpreted to mean that it only applies to the accumulation phase of members. As this is not our policy intention, we have amended this draft regulation by replacing ‘accrue’ with ‘are provided’. We consider that this change will address the concern by covering both the accumulation and decumulation phase.

Chapter 3 The Application Process

Consultation responses

Fees – regulation 7

Q3: Do you agree with the proposed fee structure, taking into account schemes containing multiple CMP sections?

Fee structure

23. 23 responses were received to this question, with more than half explicitly advising they were content with the structure or proposed range.

24. One respondent did however state that it would be expensive to have multi-section scheme approvals for only slightly different characteristics.

25. Additionally, five respondents also stated the need for transparency and consistency by the Regulator on their discretion for the level of fee for multi-section schemes.

We agree that the proposed fee structure for discretionary fees to be determined by the Regulator seems sensible and takes into consideration a number of considerations that may influence the complexity and how labour and time intensive each scheme may be. However, we would expect that in those cases where the Regulator determines the fee on a discretionary basis that they do so in a clear and transparent manner, ensuring consistency with fees determined for other schemes.

Level of fee

26. The main remaining comments received related to the proposed range of the fee, stating it was too high and not warranted. They argued that the Regulator would not need to duplicate this work as it would have been carried out by the advisers to the employer before the application was submitted. Some respondents also suggested that given the high set up costs expected for CMP schemes the proposed upper range of flat fee may deter schemes from considering setting up a CMP scheme, recommending that the Regulator take a lighter touch approach at authorisation.

Government response

Fee structure

27. We are pleased that most respondents agreed with our proposed approach on the fee structure and, although some changes have been made to the way in which draft regulation 7 is drafted, we are not making any changes to this approach.

28. Regarding those concerns raised where only slightly different characteristics are expected in a new section and everything else remains the same, such an application would be considered by the Regulator on a case-by-case cost basis (providing another section of the scheme remains authorised at the time of application). The Regulator would consider the degree of overlap between the original scheme and the new section in areas such as fit and proper persons and systems and processes. They would then use their discretion to charge a fee that reflected this consideration.

29. We agree that it is important to be transparent and consistent when calculating fees for applications in respect of schemes with more than one CMP section. The Regulator will provide more details on their processes to achieve this in their forthcoming consultation on their Code of Practice (“Code”). They also intend to issue guidance for employers and other interested parties on the matters that would influence how the fee for additional applications would be set, including illustrative examples. They would want to see early engagement from trustees and employers so they can understand the changes being proposed and so to apply an appropriate fee.

Level of fee

30. Following the consultation, the Regulator has now completed its determination and has concluded that the appropriate level of the application fee for a single application calculated on a cost recovery basis is £77,000 subject to certain exceptions, as specified in the draft regulations. Where those exceptions apply, the draft regulations state the Regulator is to specify the fee, which must be no more than £77,000 and calculated on a cost recovery basis.

31. The Regulator will work closely with all CMP schemes to ensure that those seeking authorisation are aware of all the requirements to meet the authorisation criteria. The fee will only cover the costs incurred by the Regulator in processing the application for authorisation.

32. We acknowledge that when an employer chooses to seek to open a CMP scheme that there will be costs involved, including those related to the actuarial input that will be needed. However, if the authorisation regime is to be effective, it will be essential that the Regulator comprehensively analyses all the information contained in the application for authorisation. The nature of CMP schemes means that this must also involve comprehensive testing of the actuarial input into the proposed design of the applicant’s CMP scheme. Failure to do this may result in schemes that are not fit for purpose being authorised, which will be to the detriment of members.

Chapter 4 Criteria for Authorisation

Consultation responses

Fit and proper persons – regulation 8 and Schedule 1

Q4: Fit and proper persons requirement - Are there any significant practical barriers to schemes meeting these requirements?

33. There were 23 responses to this question, with the vast majority of respondents supportive of the proposed requirements given the expected complexity of CMP provision, and the potential risks to members if these schemes are not run and overseen in a competent manner.

34. As one respondent stated, it is envisaged that “well advised, well supported and well governed schemes should have no difficulty in meeting these requirements”. Others also welcomed their similarity to the existing Master Trust requirements, which are familiar to the industry.

35. However, there was some concern that the bar set by the requirements might prevent member nominated trustees (MNTs) from participating in CMP schemes, and other respondents highlighted that as these are a new type of scheme, there will be limited experience of them in the early years.

36. Respondents identified a need for guidance from the Regulator to help clarify how these requirements will work in practice.

37. Some respondents also flagged the need to revisit the provisions should multi-employer and commercial provision be facilitated to take account of new roles and relationships in that environment.

38. A technical point was also raised in respect of the drafting at draft regulation 8(2) relating to body corporates seeking clarification on the persons intended to be caught by this provision.

Government response

Member nominated trustees and further guidance

39. We are mindful of the important and helpful role played by MNTs in pension schemes. The fit and proper persons requirements are not intended to prevent MNTs from participating in the trustee boards of CMP schemes. We feel it is reasonable to expect a base level of knowledge by a trustee at the point they commence their role, but the framework is intended to allow different levels of experience across the board.

40. The Regulator’s Code will be used to provide further clarity on the fit and proper requirements including those relating to trustee knowledge and understanding. The Code will be consulted on and laid before Parliament for approval in due course, but early discussions with the Regulator indicate that nothing within the Code is expected to act as a barrier to MNTs.

Body Corporate

41. We have amended the wording at draft regulation 8(2) to make the intent clearer.

Future designs

42. We will review the legislative framework to ensure it is fit for purpose as future designs and alternative providers become clear and are facilitated.

Consultation responses

Scheme design – regulations 9, 10 and 11 and Schedule 2

Q5: Scheme design requirement - 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?

43. There were 29 responses to this question, mainly from actuaries and pensions professionals. Most respondents recognised the need for setting some parameters in respect of soundness in order to protect members. Respondents’ concerns focused on the following areas:

• whether soundness might be defined in regulations
• the role of the scheme actuary in considering non-actuarial matters
• the drafting or practical application of the gateway and live running tests which may lead the scheme to close to further accruals
• communications
• the application of soundness tests to future designs

Government response

Defining soundness

44. We have given significant thought to this matter but concluded that there is no sensible way in which soundness can be encapsulated in a single definition.

45. Ultimately, decisions on soundness will be impacted by whether the standards set out in the draft regulations – such as the ‘gateway’ or ‘live running’ tests - are met, and whether the Regulator is satisfied with the reasoning and justifications behind the conclusions reached on the relevant matters. These matters will need to be sufficiently evidenced.

46. However, we have made amendments to draft regulations 10 (viability report) and 11 (viability certificate) and Schedule 2 to help clarify the considerations and evidence expected of the scheme actuary and the trustees, and how this flows through to the matters to be considered by the Regulator when satisfying itself the design of a scheme is sound. These changes are intended to draw a clearer line between each stage of determining soundness.

47. Some respondents were concerned that the Regulator would look at other areas or items beyond those required in legislation in satisfying itself a scheme’s design is sound. The Act and the draft regulations set out the matters that the Regulator must take into account to decide whether it is satisfied that the design of a collective money purchase scheme is sound and the Regulator’s Code will provide further guidance.

Matters to be considered by the scheme actuary (viability certificate)

48. Some respondents expressed concern that when certifying the scheme, the scheme actuary must have regard to non-actuarial matters such as whether the scheme rules meet certain requirements prescribed in legislation. Whilst the scheme rules on these matters are expected to relate to matters of fact, there was some nervousness amongst respondents who viewed this as a legal matter and outside the actuarial professional skillset.

49. The scheme actuary’s consideration of scheme rules is a requirement of the certification process under section 13(2) of the 2021 Act. This is intended to provide traction for the Regulator to withdraw authorisation should such rules be removed after initial authorisation.

50. Nevertheless, we considered carefully whether the wording in the draft regulations should be amended. Further, we want to ensure that a scheme actuary is able to take advice on this matter, if they wish to do so.

51. On balance, we concluded we should retain the current drafting. We envisage that the scheme actuary may have regard to the advice provided to the scheme’s trustees on this matter or seek their own legal advice should they consider this to be warranted.

52. Some respondents expressed similar concerns in respect of the explanations required from the trustees under Schedule 2 relating to the scheme’s design and rules and their alignment with legislative requirements. We envisage that the trustees will be able to refer to the advice provided to them for example by the scheme’s legal advisors with regards to these matters.

53. An additional concern in respect of matters which might be outside of actuarial competence was also mentioned in respect of the consideration of communications. The concern here is that assessing whether certain matters have been “accurately communicated” in the current member booklet and wording used in annual benefit statement(s) is not a specialism of the scheme actuary and may lead to information which is not conducive to member understanding, or an expectation that the actuary must check every individual communication.

54. In simple terms, we expect the scheme actuary to be satisfied that the actuarial advice being used to underpin key communications is properly used. To help make this clearer, we have amended the wording in draft regulation 11.

55. Regarding how these requirements might be met in practice, early discussions with the Regulator on its Code have indicated that this might be satisfied for the annual benefit statement(s) through evidence that the relevant template wording is checked by the actuary. There should not be a need for the scheme actuary to review every member letter. The intention is that the actuary will focus on actuarial matters. The Regulator expects to provide more details on this matter when it consults on its Code.

Other changes to the gateway and live running tests

56. Following some technical comments, mainly from actuaries, we have amended and reordered draft regulation 11 to help make the tests and certification requirements clearer. We have also corrected the drafting in the first gateway test relating to expected annual increases to bring contributions made by the employer into scope, as was the original intent.

57. Following comments from respondents, we are also in discussion with the Regulator about what further guidance might be provided for the scheme actuary in respect of these tests and the soundness requirements more generally.

The sensitivity of the 2nd live running test

58. Some respondents expressed concern that a period of unusual economic activity at the point this test is undertaken might mean that it is failed and lead to the scheme being closed, even though the conditions which led to this failure are expected to be a temporary blip.

59. The test in question is already designed not to be overly sensitive to short –term changes in economic conditions and we have decided, therefore, not to amend the test. Failure to obtain a viability certificate – e.g. because the actuary cannot give the necessary certification – is a significant event which must be notified to the Regulator. This would enable the Regulator to decide whether to exercise the discretion permitted under section 30(1) of the 2021 Act as to whether to withdraw authorisation or whether to permit the scheme to continue for a period pending further certification as to its viability. The justification for such a decision would need to be evidenced to the Regulator’s satisfaction.

Reference date

60. Some concern was expressed that the drafting could prove “problematic in circumstances where the viability certificate cannot be provided within 10 months of the reference date.” It was felt that as drafted, a short delay in sign-off could invalidate existing calculations, requiring the reference date to be changed and potentially major re-work. We have considered this but decided the current timescales should be sufficient. We will, however, keep this in view to see whether significant problems arise during live running.

61. A similar concern was raised in respect of the reference date for the viability report produced by the trustees. Again, we will keep this in view to see whether this requirement causes problems during live running.

Communications

62. One respondent mentioned the potential difficulties in communicating the failure of a live running test to members, and why this might lead to the closure of the scheme to further accruals. We recognise that there are always challenges in communicating the effects of complex actuarial calculations and the actions arising from these. We acknowledge that collective schemes will bring their own challenges in this respect. Whilst the soundness tests are not intended to be overly sensitive, they are intended to provide a sensible back stop for when it may no longer be appropriate to continue operating the scheme on its current basis.

63. Should the scheme need to close due to failing a live running test or for other reasons set out in scheme rules, then this will need to be communicated to members. However, we do not think it is unreasonable to expect trustees (with support from the scheme actuary and other advisors) to be able to communicate in a meaningful way, why it is sensible for the scheme to close in certain circumstances, for example if members are not expected to receive benefits at least equal to what they personally contributed.

Alternative tests and future designs

64. Some respondents, whilst appreciating that the soundness tests “should be drafted to allow schemes similar to that being introduced by Royal Mail” felt that it was important to “also recognise that other types of collective scheme are possible and that the drafting should not disallow those variations.” We accept that interest in CMP is increasing and that alternative designs are likely to emerge in the next few years, reflecting the needs of individual employers. Our immediate focus is the framework for single and connected employer schemes, but we will, of course, consider what constitutes a suitable authorisation framework for other new designs as these become clearer. Officials are in discussion with potential new adopters to help identify what these new models might look like.

Scheme design – continued

Q6. Scheme design requirement - 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?

65. There were 26 responses to this question, with the vast majority indicating that it is “neither desirable nor practically possible to design objective triggers for when a CMP scheme should be wound-up”. Part of the reason for this was that “CMP schemes by their nature are sustainable by being able to reduce the level of member benefits as far as is required to maintain sustainability.” Respondents also recognised that even if benefits are reduced significantly in a closed scheme, it may still be in members’ best interests to remain in the scheme, for example if economic conditions are affecting pensions and savings more generally. It would be undesirable to force trustees to wind up the scheme in those circumstances.

66. Many respondents pointed out that scheme rules would prescribe some circumstances where the scheme must be wound up, including where the employer no longer wishes to continue with the scheme. Respondents also indicated that cost effectiveness is likely to be a deciding factor in many cases, given that the limits on the deductions for the costs of running the scheme would serve as a limit on how long a shrinking CMP scheme can continue. It was acknowledged that if a CMP scheme is about to become too small to meet its running costs, then it is sensible for it to wind up. In such circumstances, it was recognised that the financial sustainability requirements rather than the soundness provisions would provide a back stop for the Regulator to withdraw authorisation, should it need to intervene.

Government response

67. Considering the views expressed, we do not intend to prescribe a ‘back stop’ setting out the specific circumstances in which a CMP scheme must be wound up.

Consultation responses

Financial Sustainability – regulation 12 and Schedule 3

Q7: Financial sustainability requirement - Do you think the regulations cover the appropriate matters that must be taken into account?

68. There were 20 responses to this question, with many respondents supportive of the requirements which were felt to be reasonable.

69. Some respondents correctly anticipated that the Regulator’s forthcoming Code will include further details of how relevant costs should be calculated, and the supporting evidence needed at initial authorisation and on an ongoing basis.

70. A few respondents asked whether there might be a grace period for new schemes to build up funds needed to wind up a scheme in the event of a triggering event, given such a scenario is unlikely to occur in the first few years of the scheme’s existence.

71. Some respondents felt the information required in respect of an employer’s financial position was excessive, whilst others commented on the challenges in ascertaining the financial position of numerous employers where these have committed to meeting relevant costs, should multi-employer schemes be facilitated in the future.

Government response

Grace periods

72. It is important that sufficient funds to meet wind up costs are available at the point they are needed, so we have not provided for a grace period in respect of these costs. The Regulator’s forthcoming Code is expected to provide further information on financial sustainability, including the potential use of employer guarantees.

Financial information in respect of the employer

73. It is important that any guarantee from an employer to meet relevant costs is credible and realisable. This does require assessment based on detailed information about the employer.

74. With regards to the future challenges posed by multi-employer schemes, we will review the authorisation criteria and other provisions to take account of any new designs that are brought forward.

Chapter 5 Valuation and Benefit Adjustment

Consultation responses

Valuation and benefit adjustments – regulations 17 to 21

Q10: Are the regulations clear about how valuation and benefit adjustment is to take place?

75. There were 27 responses to this question with seven respondents agreeing the draft regulations were clear.

76. No respondent fundamentally disagreed with our approach, but a lot sought more clarity in some areas of the draft regulations. This included several respondents who were unclear about the use of ‘sufficient’ in draft regulation 17. Other respondents suggested it would be better in relation to the cost of funding increases for the reference to “as measured relative to the projected change in inflation” to be removed.

77. Similarly, some respondents also sought clarity over the use of ‘revise’ in draft regulation 17(9) and whether a revision to the planned reduction included not making a reduction or making an increase if that was justified and appropriate. Other respondents were concerned that draft regulation 17(10) might lead to greater reductions having to be imposed on members where a further reduction might need to be made on top of an existing multi-annual reduction, and that this would undermine the policy intention of having a smoothing mechanism in relation to reductions.

78. A few other respondents raised concerns about draft regulation 19(2), which enabled the scheme actuary to make adjustments, prior to certification, in order to take into account changes in asset values, membership numbers or other matters. Their concerns included potential increased advisory costs and that by allowing for post valuation experience the process for determining appropriate increases would be made more complex than if decisions were based on conditions at a fixed point such as the effective date. Another respondent was unclear why the decision sat with the actuary rather than the trustees of the scheme and suggested this should be changed.

79.One respondent raised issues with draft regulation 20(e), which provides that the trustees of the scheme must inform the Regulator whether the failure to apply the benefit adjustment correctly will or is likely to result in any negative impact on the scheme’s ongoing ability to deliver the pension benefits under the design of the scheme. The respondent was unclear what was meant by the design of the scheme.

Government response

80. We welcomed the helpful feedback we received to this question and have made some drafting changes to make draft regulations 17 and 19 clearer. The Regulator will also provide clarity on these draft regulations in its forthcoming Code.

81. We consider that the word ‘sufficient’ provides the flexibility that is needed in draft regulation 17(4)(e). Where the trustees of a CMP scheme are considering making an increase, they are required to determine the cost of funding that increase. This calculation involves determining what the cost of providing that increase would be over the remaining lives of the membership of the scheme and takes into account changes in projected inflation.

82. Once this information is established, the trustee will need to determine whether the available assets of the scheme are sufficient to fund that increase over the same timelines. The trustees should not provide for increases that are either lower or greater than that can be met by the available assets. For example, trustees should not be providing increases that would potentially benefit current pensioners at the expense of future generations of pensioners. We have made some drafting changes in these areas to clarify the policy intent.

83. It should be noted that because we have inserted a new provision, which is now draft regulation 17(5), the numbering of this draft regulation has changed slightly. This means, for example, that what was draft regulation 17(9) is now draft regulation 17(10).

84. In relation to the points raised with regard to previous draft regulations 17(9) and 17(10), we have amended the drafting to provide greater clarity. Although the policy intention is that a multi-annual reduction (MAR) cannot be adjusted, there is some flexibility with the design of subsequent MARs which are required when there is already a MAR in effect.

85. Draft regulation 17(10) deals with situations where in a period covered by a MAR, a subsequent valuation results in an increase against the baseline created by the MAR. It requires the trustees, having taken advice from the scheme actuary, to offset that increase against the reduction which is already planned as part of the MAR applying in that year. This will produce overall a smaller reduction, an elimination of the reduction, or an increase as appropriate.

86. Draft regulation 17(11) concerns a scenario where a valuation undertaken during a period covered by a MAR results in a further reduction needing to be made. It requires this further reduction to be made on top of the existing MAR, to produce a larger total reduction. However, under this provision and under situations covered by draft regulation 17(10), the integrity of the existing MAR is still maintained. Where the further reduction during a period covered by a MAR is also to be applied as a MAR, draft regulation 17(12) (and, in the case of a period covered by two MARs, draft regulation 17(13)) sets out different restrictions on how the further MAR can be applied.

87. We consider that the changes outlined in paragraphs 84 to 86 more clearly set out and achieve our policy intention of allowing smoothing of planned reductions to mitigate the impacts on members and that this would also include some smoothing of multiple multi-annual reductions.

88. We have amended draft regulation 19(2) to clarify that, where scheme rules permit, it will be for the trustees of the scheme, having sought the advice of the scheme actuary, to decide whether post valuation experience should be taken into account in an actuarial valuation. We would expect the scheme rules to set out the circumstances under which the trustees might consider whether to carry out a post valuation exercise or not.

89. With regards to draft regulation 20(e), we do not consider that any substantial changes are needed. The Regulator will be setting out in its forthcoming Code more detail on how it will assess whether the design of a CMP scheme is sound. This is in relation to the scheme design authorisation criterion. We consider it appropriate for the Regulator to be made aware when the trustees consider that a failure on their part to apply a benefit adjustment correctly might lead to a negative impact on the ability of the scheme to provide its aspired to benefits.

90. The nature of CMP schemes means that the benefits will normally fluctuate dependent on factors such as investment performance and changes in longevity. The focus of draft regulation 20(e), therefore, is on the Regulator understanding when a failure on the part of the scheme has had a further material impact on the benefits paid by the scheme, if it is to remain sustainable in the longer-term. The Regulator will provide further clarity in its forthcoming Code.

Chapter 6 Ongoing Supervision Framework

Consultation responses

Significant events - regulation 23

Q11: 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?

91. There were 21 responses to this question with 12 respondents agreeing that the list of significant events was comprehensive. No respondent disagreed with the draft regulations though some respondents sought greater clarity in certain areas.

92. Five respondents queried the use of ‘significant’ in the draft regulation, in relation to certain events and were concerned that this might be open to interpretation.

93. Another respondent was unclear why only certain events were described in the draft regulation as specified significant events.

Government response

94. We are pleased that many respondents thought that the list of significant events in draft regulation 23 was comprehensive. In relation to the respondents who wanted greater clarity over the use of ‘significant’ in two of the significant events, we do not consider that a change to the draft regulation is needed to make things clearer. This is because the Regulator will use its Code to provide clarity about what might constitute significant in this context. The Regulator will be more interested in the decision-making process, advice and considerations that have led to the change rather than the change itself.

95. The reason we have only referred to certain events as specified significant events is that these are events where requirements are also being imposed for the Regulator to receive additional information such as the nature of the event. This additional information will provide the context the Regulator needs to determine what its next steps might be and whether remedial action needs to be taken by the trustees of the scheme. In the case of the events which are not specified significant events, once the Regulator has received a notification of the event it can, if needed, request more information from the trustees.

Consultation responses

Discharge of liabilities and winding up a scheme under continuity option 1 Significant events - regulation 29 and Schedule 6

Q12: 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?

96. We received 23 responses in respect of this question, primarily from members of the pensions industry.

97. Respondents acknowledged that the wind up of a CMP scheme and the transition from collective benefits to individual discharge amounts is new ground and will, therefore, pose some challenges.

98. Some respondents welcomed, therefore, the “comprehensive” nature of the proposed framework and felt that the provisions provide a “good framework for protecting the rights of members” and a “clear” approach to winding up CMP schemes. However, others expressed concern that the framework is “overly complicated”, for example in respect of communications and quantifications at specific points during wind up or were uncertain as to how some aspects are expected to be undertaken in practice. Concern was also expressed that the approach for off-setting periodic income payments might require significant recalculations immediately before members are discharged, which would be difficult to undertake in practice

99. More generally, there were some concerns in respect of the potential discharge options available in the absence of large CMP schemes from commercial providers currently, although it was acknowledged that it was unlikely that a CMP scheme would need to wind up in the near future.

100. The need to ensure that the periodic income and discharge proposals are compliant with the tax rules was also mentioned by some respondents.

Government response

Quantifications

101. We recognise that winding up a CMP scheme will be new ground for trustees, administrators, actuaries and members, which is why our approach has sought to be comprehensive.

102. Whilst trustees will be required to have a clear implementation plan to help ensure that the wind up isn’t prolonged, we recognise that this process may still take some time.

103. We are mindful that the type and value of the scheme’s assets will change during this period, reflecting the changes that need to be made as the scheme goes through the winding-up process.

104. The prescribed quantifications are intended to ensure that account can be taken of the value of the scheme’s assets and what this means for members, including the level of periodic income payments that are required by the 2021 Act to be made for pensioner members, over the course of wind up. We consider that this approach is consistent with a basic principle of CMP schemes that there is a balance between payments and the value of the assets. The intention is that the scheme does not de-collectivise until the end of the winding-up process, when the scheme discharges its liabilities to members, so the value of members’ rights under the scheme will continue to reflect their share of the collective assets until that point.

105. It is not intended that all calculations regarding the members’ final discharge amounts are left to the last minute. The prescribed quantifications are intended to facilitate the scheme making steady progress towards being able to quantify the final amount to be transferred at the point of discharge. With effective record keeping, it does not seem unreasonable to expect trustees to have a near to final view of the discharge amount by the date the final estimate (as prescribed in the draft regulations) is carried out.

106. Trustees are not expected to recalculate the level of periodic income payable right up to the last minute. This seemed unnecessary beyond the final estimate point by when the trustees should have a near to final view of the value of the assets. We have amended paragraph 7(6) of Schedule 6 to make this clear.

107. However, the amount of periodic income received by pensioner members must be off set from the amount that represents their share of the collective assets before they are discharged. The scheme is expected to keep track of these payments through-out wind up so that this can be done.

108. We have made some additional minor drafting changes to Schedule 6 where in light of the consultation responses it was felt that further clarity would be helpful.

Communications

109. We appreciate the concerns in respect of the communication requirements, but on balance we consider the current requirements to be appropriate.

The tax regime

110. HM Revenue & Customs (“HMRC”) is aware of the draft regulations and has placed provisions in the most recent Finance Act to accommodate CMP schemes. They will continue to review the legislation to assess whether any further provision is needed.

Consultation responses: other matters raised in relation to the ongoing supervisory requirements

Supervisory return - regulation 24

111. Two respondents raised queries about the supervisory return. One respondent thought that the wording of section 27(2) of the 2021 Act about when a supervisory return needs to be submitted by the trustees to the Regulator was unclear. Another respondent suggested that the wording in draft regulation 22(b) was an open-ended ability for the Regulator to ask for pretty much any other information in the supervisory return. They suggested that this should be a more specific list of information, which the Regulator is entitled to require in the supervisory return.

Government response

112. Having considered these comments, we have concluded that no changes to the draft regulation are needed. On the first point, we consider that section 27(4) of the 2021 Act addresses the underlying concern as it stipulates that the trustees of a CMP scheme may not be required to submit a supervisory return more than once in any twelve-month period.

113. On the second point, it is important that the Regulator has access to the information it needs to carry out its supervisory role, in particular information concerning the authorisation criteria. It should be noted that there is equivalent provision in the Occupational Pension Schemes (Master Trusts) Regulations 2018. An inherent aspect of the Regulator’s role is that they will be expected to act in a reasonable manner and only ask for information that is necessary – the draft regulations are clear that the Regulator may only require information via the supervisory return to the extent it has not already been provided with the information. We have sought to provide flexibility in our approach to enable the Regulator to request information based on what is needed rather than have an inflexible and potentially over-burdensome list.

Risk notices - regulation 24

114. One respondent raised a couple of concerns about this draft regulation. They considered the timelines to be too tight for what they thought might be a complex issue. They also thought that the risk notice from the Regulator should specify which authorisation criteria was likely to be breached.

Government response

115. The Regulator would have already been engaging with the CMP scheme for some time before the risk notice is issued. We acknowledge the timings are challenging but we also recognise that where a risk notice is issued it is because the Regulator considers there is an issue of concern and that the scheme will breach the authorisation criteria, or is likely to breach them, if the issue is not resolved, which will require swift action to rectify.

116. We consider that the second point will be addressed through section 29(3)(a) of the 2021 Act, which already requires the Regulator to “identify the issue of concern”. This, alongside the statement the Regulator has to provide under draft regulation 24(4)(b), should make it clear which authorisation criteria the Regulator considers are at risk of being breached.

Triggering event notification requirements - regulation 25

117. A respondent was concerned with the drafting of this regulation and thought it should not be necessary for notification of events to be undertaken by each trustee and participating employer if they are aware that notification has already taken place by another party. They considered this to be an unnecessary duplication. Another respondent considered that the time limits for these notifications should be expressed as ‘working days’ and not just ‘days’.

Government response

118. While the legal duty to notify falls on each of the relevant persons, the Regulator would expect the scheme to have systems and processes in place to facilitate compliance with this requirement and manage the notification process. Further clarification will be provided in the Regulator’s Code and/or guidance, which should address the concern around duplication in notifications.

119. A triggering event can pose a significant threat to the future of the scheme and the interests of members. Given the seriousness of these circumstances, which may risk the scheme being wound up, we think the time limits and use of ‘days’ is appropriate. We would expect trustees to act quickly in these circumstances.

Administration charges and the implementation strategy - regulation 27

120. One respondent was concerned that the approach to setting administration charge levels in the draft regulation was too onerous and would not take into account the additional activities that would need to be undertaken in a triggering event year. This would include compiling an implementation strategy. They thought that our approach would not factor in the extra costs involved in a triggering event year.

Government response

121. We do not consider that any change is needed. In order to meet the financial sustainability criterion, the Regulator needs to be satisfied that the CMP scheme has sufficient resources in place to meet its setup and running costs, and to meet the cost of resolving a triggering event, which may include the need to wind up. This will help ensure that when a triggering event occurs the cost of dealing with it are not passed to members. It will be for schemes to ensure that their charges are set appropriately, fairly and in compliance the collective defined contribution charge cap.

Chapter 7 Publication and Disclosure of Information

Consultation responses

Disclosure proposals

Q15: Do you agree with the amendments made to the Disclosure regulations for CMP schemes?

Q16: 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?

122. 27 responses were received to question 15 and 20 responses to question 16. Nine respondents solely commented that they agreed with the disclosure proposals, including welcoming a proportionate approach and the disapplication of some of the money purchase requirements. 13 respondents commented that they had no further amendments to suggest on disclosure, other than to review requirements once CMP schemes bed in.

123. Of those respondents that did go on to comment further, the points raised ranged from high level issues to more detailed technical recommendations either to policy or the drafting of the amendments themselves.

124. In terms of the high-level points raised, these included suggestions to have a separate set of disclosure regulations for CMP schemes to help with navigation of the complex regulatory framework. Respondents also recommended that the Department for Work and Pensions (“DWP”) should liaise with the Money and Pensions Service (“MaPS”) to review their guidance to ensure this included CMP schemes. Some respondents also asked that DWP provide clarification on how CMP schemes would be impacted by the recent ‘stronger nudge’ and dashboard proposals for CMP schemes.

Dis-applying other money purchase requirements

125. Two respondents suggested that the requirement to provide lifestyling under regulations 6 and 18 of the Disclosure regulations (i.e. the Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013) and four respondents that the Chair’s statement under Schedule 3 should be dis-applied as they are not relevant to members of CMP schemes.

Extending/amending new proposals to provide clarification or fit better with CMP scheme processes throughout – benefit fluctuation statement

126. Three respondents suggested alternative wording for the new statement that is to be used throughout the draft regulations to better highlight the appropriate risks to members on the possibility of benefit fluctuations.

Regulation 17A and 22A - annual benefit statements and benefit adjustments notifications

127. 10 respondents recommended that the timings set out in the annual benefit statement (draft regulation 17A) and benefit adjustment notifications (draft regulation 22A) needed to be reviewed so that these fit with envisaged scheme processes and allowed for de-coupling of the two documents. Decoupling was also felt necessary due to the scope and content of these documents. One respondent said that there is an implied assumption made in the drafting that annual benefits statements and notices of adjustments would be made at the same time, which they thought may not be helpful. They said that there are benefits in so far as notices of adjustment can feed into annual benefits statements, though they considered the combination of these to the same timing may create difficulties for reasons of dependency. On balance, they preferred to see the regulations re-drafted in order to leave schemes the opportunity to decouple annual benefits statements and notices of adjustments.

Schedule 6A - content of the annual benefit statements

128. 11 respondents commented on the need to review the use of the term ‘value’ and ‘amount’ in Schedule 6A (annual benefit statement) to ensure they are used in the correct context.

Harmonisation of details with the main set of CMP regulations

129. Other technical comments were received in relation to harmonising the wording in the Disclosure regulations with the draft of the Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2022, for example in Schedule 2 and Schedule 11 regarding making adjustments “equally to all members” and regulation 25 (and associated Schedules) to ensure they fit with Schedule 6 to the draft of the Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2022 on wind-up.

Extending the existing disclosure requirements

130. One respondent recommended we amend paragraph 10 of Schedule 3 (to be provided under regulation 13 – other information to be given on request), so that as in DB schemes, CMP schemes must also provide their actuarial valuations to relevant persons on request.

The requirement to provide to members etc. on request a copy of the most recent valuation does not apply as it only references valuations under Part 3 of the Pensions Act 2004. This requirement should be extended to cover valuations under section 20 of the Pension Schemes Act 2021.

Government response

Separate set of CMP disclosure regulations

131. We note the suggestion to have a separate set of CMP disclosure regulations. As this would require a wholescale revision of both the existing Disclosure regulations and CMP proposed amendments, at this time, we will concentrate on the CMP specific requirements. However, we will keep this under review if at any point in the future there is a fundamental review of the disclosure framework.

MaPS guidance on CMP schemes

132. We plan to engage with MaPS to ensure, where relevant, their guidance includes information on CMP schemes.

Stronger nudge proposals

133. The policy intent is that where CMP members request access to information on their pension freedoms (under regulation 18A) and then pursue this option then the stronger nudge proposals will apply equally as they do to members of other money purchase schemes.

Pensions dashboard

134. The data requirements for CMP schemes to provide to dashboards are currently under consideration. Details will be included in the forthcoming consultation on the dashboard proposed draft regulations.

Exemption from providing lifestyling information

135. We agree that the design of a CMP scheme would mean that lifestyling would not apply. We do not, however, think it necessary to include an explicit exemption in regulation 6 or regulation 18 for CMP schemes as the regulations only require this information to be provided where lifestyling does apply. Further, the existing definition of lifestyling in regulation 2 is sufficiently clear to avoid the need for an express disapplication.

Exemption from providing a Chair’s statement

136. We do not agree that CMP schemes should be exempt from publishing a Chair’s statement (as in regulation 23A of the Occupational Pension Schemes (Scheme Administration) Regulations 1996). We feel, like other money purchase scheme members, information on costs and value for money is still relevant to keep members informed of the overall administration of their pension. It also allows scrutiny by other interested parties.

Changes to the disclosure amendments

Benefit fluctuation statement

137. The statement, throughout the amendments, provided to members to inform them that there is no promise or guarantee as to the rate or amount of benefit under the scheme and that it may fluctuate, has been expanded, as we agree with comments that this should also highlight the risk that benefits could be reduced both before and after they become payable.

Timing of the annual benefit statement (regulation 17A)

138. To take account of concerns raised that consulted proposals did not fit with the envisaged scheme processes we have revised draft regulation 17A. We agree that it is not necessary to link the requirement for the annual benefit statement to the benefit adjustment process but would be more appropriate that this is provided, annually, within 12 months of the end of the scheme year. Trustees therefore deciding the most appropriate date for their scheme to issue their statement to members. The first statement must be produced within 12 months of the effective date of the first actuarial valuation^{[footnote 1]}.

Content of the annual benefit statement (Schedule 6A)

139. We have noted the significant concern with the terminology used within Schedule 6A, relating to the use of ‘value’. Following further internal scrutiny, along with actuaries, this has now been amended to be more explicit in the description of what figure we expect to be provided, i.e., the amount of benefit that the member has built up under the scheme at the illustration date which represents the member’s share of the available assets of the scheme.

140. Additionally, to also reflect changes made to draft regulation 22A, we will no longer be requiring information on the benefit adjustment in the annual benefit statement as all members and beneficiaries will receive a benefit adjustment notification under draft regulation 22A.

Scope and content of the benefit adjustment notification (regulation 22A and Schedule 7)

141. As noted above, draft regulation 22A has been amended to reflect those suggestions that this notification should be provided to all members (active, deferred and pensioner members) and beneficiaries. Although we feel different information is relevant to those pre and post retirement (where benefit is in payment), Schedule 7 now reflects this.

142. Also, to take account of comments received that indicated providing benefit adjustment notifications two months before benefits are adjusted is not workable in practice, we have now amended to instead allow a maximum of six weeks.

Harmonisation of details with the draft Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2022

143. Following further internal scrutiny we agree that wording consulted on in paragraph 18A (now paragraph 18B) of Schedule 2 and paragraph 3 of Schedule 11 may present a risk and have made changes to negate this and ensure it reflects the intent in the provisions in the draft Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2022 relating to calculation of benefits. We also consider that, given the winding-up provisions in Schedule 6 to the draft Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2022, certain winding-up requirements in the Disclosure regulations need not apply, namely: the requirement to provide the information in paragraph 7 of Schedule 8 as required under regulation 24; and the requirements provided for in regulation 25.

Consultation responses

Publication requirements

Q17: Do you agree with the new publication requirements for CMP schemes?

144. 20 responses were received to this question, 17 expressly supporting the publication requirements, advocating the need to be transparent. Although 10 respondents did go on to give further feedback on specific points. Of those, the main recommendations were to require additional publication of information or documents for CMP schemes – including the schemes continuity strategy, the viability report, the actuarial valuation, and the full range of assumptions used on expected future returns.

145. A respondent suggested that greater transparency in this respect would make it possible for anyone, whether a member, a pension expert or any other interested party, to see how a CMP scheme is being run and form an informed opinion about it.

Government response

146. We note the suggestion that CMP schemes must also publish their continuity strategy, viability report and actuarial valuation. We are content that the new publication requirements for a scheme design statement and valuation and benefit adjustment statement in draft regulation 29B and Schedule 11 will cover the key information that will be useful to members and other interested parties.

147. We have however introduced paragraph 10A of Schedule 3, as suggested, to ensure that a relevant person can request a copy of the full scheme actuarial valuation if they so wish.

148. We also agree with the suggestion that the CMP scheme should publish their model used to project benefits for the purposes of the annual benefit statements. The requirement to provide this has been added to draft regulation 29B.

149. We will keep the publication requirements under review as CMP market grows and our understanding of what is important to members, employers, and other interested parties’ increases to enable further scrutiny, challenge, and comparisons across schemes.

150. Trustees of CMP schemes, of course, can themselves choose to publish other scheme documents if they so wish that will enable additional scrutiny of their scheme.

151. The existing DWP guidance^{[footnote 2]} will be extended appropriately to include the publication requirements for CMP schemes.. This will be published at the same time as the final draft of the Occupational Pension Schemes (Collective Money Purchase Schemes) (Modifications and Consequential and Miscellaneous Amendments) Regulations 2022 are laid and also come into effect at the same time as those regulations come into force.

Consultation responses

Communications outside statutory requirements

Q18: Outside of the statutory communications outlined in the draft regulations, are there any regular communications you expect to send out to members? Please consider deferred members and those in decumulation in your response.

152. 18 responses were received to this question. Some to re-iterate that they thought member disclosure was important and agreed with our view that all members should be treated equally for communication purposes and that there does need to be a balance of legislation requirements and allowing trustees to tailor their communication to their member’s needs. For example, a few commented that they would expect wider use of electronic media in CMP schemes or the use of newsletters etc. but they would not anticipate these should form part of the disclosure regulations – it was more sensible for trustees to have discretion.

Government Response

153. We advocate that CMP schemes fully utilise the wide range of media available for providing information that best suits their member’s preferences. The regulations set out the minimum requirements but, if schemes so wish, they can provide further communications that are over and above their statutory requirements provided, of course, these are clear, accurate and not misleading.

Chapter 8 Member Protection and Transfers

Consultation responses

Q19: 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?

Charge cap - Schedule 7

154. We received 23 responses to this question with 12 respondents agreeing with our approach.

155. No respondents fundamentally disagreed with our approach. It was more the case that respondents flagged concerns over our approach, misunderstood the policy intention or wanted greater clarity in some areas of Schedule 7.

156. Some respondents were concerned that the introduction of a charge cap in CMP schemes would limit investment opportunities.

157. Other respondents asked for clarity on what charges would be excluded from the charge cap in CMP schemes and what would happen if the charge cap was breached.

158. A few respondents wanted greater understanding about the policy aim behind the draft regulations concerning members who are transferred to another scheme without their consent. Other respondents wanted confirmation that the collective funds under management charge, which is referred to in the draft regulations as being based on a percentage of the value of members’ rights, was being based on a percentage of the value of the available assets.

159. Several respondents were concerned that the process of establishing the value of the scheme’s assets at no less than quarterly points in a scheme year in order to assess compliance with the charge cap would be too onerous and expensive. They considered that this would entail undertaking a full valuation or the calculation of transfer values for each member of the CMP scheme.

160. Some respondents were also unclear about the ‘opt-out’ of the charge cap in Schedule 7 and how this would work in a CMP scheme.

Government response

161. We are pleased that respondents generally supported our approach and that no one fundamentally disagreed with a charge cap in CMP schemes. One key feature of this new type of pension provision is that the longer-term horizon for CMP schemes should mean they will be able to invest in more productive assets such as illiquid investments. We do not consider that the introduction of a charge cap to protect members from excessive charges will prevent this type of investment from happening. The same expectation exists with defined contribution (DC) schemes subject to the individual defined contribution cap (“IDC cap”) and the government has introduced some easements relating to performance fees to encourage investment in illiquid assets. We have adopted these easements for CMP schemes as well.

162. We have aligned with the IDC cap in that the charge cap in CMP schemes will apply to costs and charges associated with scheme and investment administration. The charges, such as transaction costs, that are excluded from the IDC cap will also be excluded from the charge cap in CMP schemes., Trustees will be required to ensure compliance with the charge cap in CMP schemes. Failure to do so can result in the Regulator issuing a compliance notice or even a penalty if the situation is not addressed.

163. We want to ensure that where a member is transferred to another scheme, which doesn’t have the protection of a charge cap, that they continue to benefit from the protection of the charge cap they had before they were moved, where they are moved without consent. If for example, members of a CMP scheme were transferred to another CMP scheme or section which was not subject to the CMP charge cap, it would be unfair to penalise these members as they had no choice about being moved. If, instead, these members were transferred to a DC scheme subject to the IDC cap then they would be subject to that cap. However, the IDC cap does not extend to members in decumulation so pensioner members who are moved to a DC scheme that is not a CMP scheme will not have the protection of any charge cap. We have made some drafting changes to make the policy intent clearer.

164. On the concerns raised about assessing compliance with the charge cap, we have sought to align our approach as closely as possible with that of the IDC cap. The key difference is that compliance with the CMP cap is assessed across the membership since the charges in a CMP scheme are levied collectively. There is no expectation that a full valuation should be undertaken or that a transfer value must be calculated for each individual member. Instead, and as is the case with the IDC cap, the value of the CMP scheme’s assets will be assessed at no less than quarterly points in a scheme year. This value will be determined by using the latest information regarding asset values that are available to the scheme. This follows a similar process used by defined contribution schemes subject to the IDC cap. The references in the draft regulations to members’ rights are intended to be references to the available assets of the scheme, as defined in the 2021 Act.

165. A few respondents were uncertain why we were including the option for members of CMP schemes to opt-out of the CMP charge cap in certain circumstances. This opt-out is available to member’s subject to the IDC cap and is there to enable them to access advice or services with costs that might breach the charge cap. This is consistent with the government’s support for members to be able to take financial advice as appropriate. This does not mean that members of a CMP scheme will have the option to opt-out of the scheme’s investment strategy. It does, however, mean that should a member of a CMP scheme wish to pay for financial advice for other matters, such as transferring out of the scheme in order to access the pensions flexibilities, there is a mechanism that can be used. The costs associated with taking such advice will of course be recovered from the member’s share of the collective assets.

166. We have also made a number of other clarificatory changes in Schedule 7 to help make the policy intention clearer.

Consultation responses

Transfers

167. Several respondents sought more clarity about the CMP transfer process or misunderstood what the process entailed.

168. One respondent sought clarity on what, if any, implications the draft CMP regulations had on the existing bulk transfer provisions.

169. Other respondents were concerned that once the member was provided with the estimate of their share of the collective assets that this in effect created a guarantee as they thought there would be no further opportunity to carry out a re-calculation.

170. Another respondent asked what we meant when we said the notification accompanying the estimate of the member’s share of the collective assets would highlight the potential implications of leaving a CMP scheme before retirement age.

Government response

171. We do not consider that the existing bulk transfer provisions will be affected in any way by the draft CMP regulations.

172. We have made consequential changes to existing legislation relating to member transfers to ensure that the CMP transfer process follows the transfer process for members of DC schemes. The only two differences are that the CMP transfer process includes a three-week cooling off period and given the collective nature of CMP, actuarial input will be required when calculating the member’s share of the collective assets.

173. Consequently, as CMP benefits are a sub-set of money purchase benefits, there is no guarantee attached to the estimate provided to the member following a transfer request as is the case with a non-money purchase transfer. The estimate just provides the member with an estimate of their share of the collective assets at that point in time. As with the DC transfer process, if the member wishes to proceed with the transfer another calculation will be undertaken immediately prior to the transfer out of the scheme. This calculation is designed to ensure that the members share of the collective assets reflects the latest position on the value of the CMP scheme’s assets.

174. The policy intention of the cooling-off period acknowledges that CMP provision is completely new to the United Kingdom. We, therefore, consider it will be beneficial for members to be informed about the implications of leaving a CMP scheme before retirement age. This is because the full benefits of a CMP scheme will not be realised until the member retires and starts to receive their pension income. In addition, once a member leaves a CMP scheme, they will lose the benefits of sharing longevity and investment risks. We think the cooling off period will provide the member important time in which to consider whether transferring out of the scheme is the right option for them. If the member is committed to proceeding with the transfer, they simply need to instruct the trustees to facilitate the transfer and the cooling-off period will not apply.

Chapter 9 Consequential Changes

Consultation responses

Q20: Are there any other amendments to existing legislation we should consider?

175. A couple of respondents asked for an amendment to be made to section 67 of the Pensions Act 1995, which deals with subsisting rights provisions.

It seems to us that it would be helpful to have an exemption from section 67 to allow for the change to the characterisation of benefits on winding up. Otherwise, it may be very difficult to complete a winding up in practice.

176. Other respondents wanted a change to be made to mitigate the risk of existing DB schemes, who might be facing funding deficits, seeking to re-characterise their schemes as CMP schemes once the provisions of the 2021 Act come into force.

177. A respondent also wanted a change to be made to existing legislation that would make it explicit that CMP schemes would not have any recourse to the Pension Protection Fund (“PPF”).

178. Another respondent was concerned that section 73 of the Pensions Act 1995, which concerns preferential liabilities on winding up, would apply to CMP schemes.

179. A couple of respondents also sought clarity that the changes to tax legislation, that HMRC have made in relation to CMP schemes, did apply to CMP schemes.

Government response

180. Having considered the point raised regarding section 67 of the Pensions Act 1995, we have made an additional drafting change to the amendments to the Occupational Pension Schemes (Modification of Schemes) Regulations 2006. We are content that this change makes clear that the subsisting rights provisions do not apply in relation to draft regulation 29 and Schedule 6. We believe this sufficiently addresses this concern.

181. On the re-characterisation risk concern, we plan on making transitional provisions when commencing Part 1 of the 2021 Act. These provisions will ensure that only schemes that are established after the CMP provisions come into force can be characterised as CMP schemes. This will address this concern.

182. We have made it clear in pensions legislation that CMP benefits are a sub-set of money purchase benefits. Further, paragraph 16 of Schedule 3 to the 2021 Act makes provision such that scheme sections that are CMP schemes for the purposes of Part 1 of the 2021 Act are to be treated as separate money purchase schemes. Consequently, we do not consider that an explicit exemption from the PPF legislation is needed because schemes providing money purchase benefits do not have any recourse to the PPF under the PPF legislation.

183. Section 73 of the Pensions Act 1995 already does not apply to schemes that provide money purchase benefits. We consider that this, coupled with the consequential changes we are making to the Occupational Pension Schemes (Winding Up) Regulations 1996, addresses these concerns in relation to hybrid schemes and schemes that are winding up.

184. HMRC is aware of the tax issues raised during the consultation in respect of schemes that are winding up and will consider if any changes are needed.

Chapter 10 Automatic Enrolment Quality Requirement

Quality requirement to be met in order to be a qualifying scheme for automatic enrolment purposes

185. Automatic enrolment (AE) into workplace pensions was introduced in 2012 to enable more people to save for their retirement and to make retirement saving the norm for most people in work. The law requires employers to enrol all their eligible

186. Employers who choose to use a CMP scheme to meet their AE duties will be required, as with other schemes, to ensure that the scheme meets the minimum quality requirements for qualifying schemes under the Pensions Act 2008 (the 2008 Act).

Power to prescribe an AE alternative quality requirement for CMP schemes under the Act

187. Section 20 of the 2008 Act contains the AE quality requirement for UK money purchase schemes. CMP benefits and schemes are defined in section 1 of the 2021 Act. Schedule 1 of the 2021 Act amends the definition of ‘money purchase benefits’ under section 99 of that Act to insert CMP benefits. A CMP scheme will therefore need to satisfy the quality requirement for UK money purchase schemes under section 20 of the 2008 Act in order to be a qualifying scheme for AE purposes, or the alternative quality requirement which we will prescribe in regulations under section 28 of the 2008 Act (see below).

The AE alternative quality requirement for CMP schemes

188. DWP has prepared draft regulations^{[footnote 3]} (see Annex A) that set out the alternative quality requirement for CMP schemes. The test, taking all relevant jobholders together, looks at monetary contributions by, or on behalf of, or in respect of those jobholders over the certification period, and these are assessed against prescribed percentages of their total relevant earnings over that period. DWP intends that the test will be applied to all relevant jobholders together, unless there is a material difference in the cost of providing rights to benefits to different groups (as set out in the draft regulations).

189. This alternative quality requirement for CMP schemes will operate alongside the valuation requirements in the draft CMP regulations.

Chapter 11 Impact Assessment

190. We asked questions to support our upcoming regulatory impact assessment. These questions were designed to gather evidence on the activities and costs required for the authorisation and ongoing running of CMP schemes. We have summarised the key themes from our responses under each question.

Q8: What are the financial costs required to set up the necessary systems and processes required to meet the communications criterion? Please outline any one-off and ongoing costs. This may include set up of IT platforms, data management or postal costs.

191. Four respondents highlighted the importance of clear communication to both members and employers in order to explain the complexities of CMP schemes. They noted there may be some work required in order to ensure communications were designed effectively so that complex messages could be understood by members. Some of the earlier CMP scheme communications might require input from advisors or communication professionals.

192. A further four responses stated the financial costs of setting up the necessary systems and processes to meet the communication criterion was comparable to that of a DB or DC scheme. It is likely existing communication channels and systems could be adapted for CMP schemes so there is unlikely to be an additional significant financial cost in preparing for this criterion.

193. However, other responses suggested the difficulty in assessing costs for CMP schemes given there was little first-hand experience of setting up the systems. CMP schemes and employers will have to determine on an individual basis how much resource would be required to meet this criterion.

Q9: Considering the draft regulations and criteria for authorisation, could you estimate the costs of preparing the information required for authorisation? Please outline the extent and cost of external contractors where they may be required. This may include the cost of setting up IT platforms and infrastructure, actuarial support or additional staffing required to support the creation of scheme design and the planning of financial sustainability or triggering events. Please outline if there would there be any significant differences between DB and DC schemes.

194. There were 15 responses to this question. Responses highlighted the difficulty estimating exact financial costs based on the existing regulations. Four responses suggested costs might vary depending on the individual scheme, their current capabilities and where they may need to draw in additional expertise. Actuarial, communication, investments and legal advice or expertise were described as additional support required to support authorisation. The extent of this external input would depend on how much of these capabilities exist internally in schemes.

195. Six responses highlighted comparisons between the cost of authorisation of CMP schemes and the running of other pension schemes. Two mentioned the costs are likely to be comparable to Master Trust authorisation, three mentioned some of the costs are likely to be comparable to existing DB schemes and one mentioned the establishment of Nest might be a useful guide for costs. All these responses did note the set-up, authorisation and running of CMP schemes can present a different challenge.

Q13: What are the potential ongoing financial costs associated with ensuring the scheme continues to meet the ongoing supervision requirements? This may include the cost of ongoing actuarial support, communication costs and IT platforms.

196. There were 15 responses to this question. Three responses highlighted one of the main ongoing financial costs for CMPs is the annual valuation process, which is likely to require actuarial and supervisory costs. One response noted the ongoing financial costs are case specific with clear economies of scale. Therefore, large employers may see lower costs over the long term in comparison to smaller employers.

197. One response also highlighted there is likely to be ongoing expenses arising from any ongoing actuarial or legal advice as well as administrative and communication costs. These costs would be highly dependent on scheme design and the Regulator’s ongoing supervisory requirements.

198. Two responses noted that whilst supervisory and actuarial costs may increase, it is likely communication and administration of the CMP scheme will be simpler and cheaper as the scheme becomes more established.

Q14: What steps do you intend to carry out in order to monitor equality impacts on members over time?

199. There were 15 responses to this question. Four responses suggested any equality impacts should be considered in the original design of the scheme and this is sufficiently addressed in the requirements for authorisation. Therefore, if a scheme design has been declared sound and authorised the equality impacts have been considered.

200. Two responses outlined that during actuarial valuations they expect there to be some review of any equality impacts. One of these responses suggested this review could coincide with actuaries reviewing the contribution or accrual rates. Two responses mentioned trustees may have a role in monitoring but did not describe what kind of role they expected them to take.

201. A further two responses outlined the difficulty in measuring equality impacts due to the limited information pension schemes collect. They both suggested employers may have access to information to monitor equality impacts over time.

Government response

202. Respondents considered that equality would be factored into the design of the scheme and that designs that introduce inequality, such as intergenerational unfairness, would not likely pass the scheme design tests at authorisation.

203. As set out in the consultation document certain provisions of the draft regulations seek to address issues to do with intergenerational unfairness.

204. We recognise that equality considerations are important and we will monitor this on an ongoing basis as we check whether the draft regulations are working in the way we intend.

Next steps

205. Draft legislation has been laid today that, subject to Parliamentary approval, will come into force on 1 August 2022 for single or connected employer CMP schemes. We plan to lay draft regulations making the necessary consequential and miscellaneous changes in February 2022.

206. CMP authorisation and ongoing supervision will be administered by the Regulator who will produce detailed practical support for schemes through operational guidance and a Code of Practice. The Regulator expects to consult on its draft Code of Practice in January 2022. We have worked closely with the Regulator including in relation to their draft Code of Practice.

207. The 2021 Act also contains powers to make regulations to enable other forms of CMP such as decumulation-only vehicles, commercial Master Trusts and industry-based multi-employer schemes to be established. We are encouraged by the level of interest in other forms of CMP provision shown in the responses to our consultation. We will continue to learn from the experience of single or connected employer schemes as the new regulations bed in and will continue to work with interested parties on how to facilitate other forms of CMP provision.

Annex A: The draft Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2022

The draft Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2022

Annex B: The draft Occupational Pension Schemes (Collective Money Purchase Schemes) (Modifications and Consequential and Miscellaneous Amendments) Regulations 2022

The draft Occupational Pension Schemes (Collective Money Purchase Schemes) (Modifications and Consequential and Miscellaneous Amendments) Regulations 2022

Annex C: List of respondents

The following individuals and organisations responded to the consultation:

Aon

Association of Consulting Actuaries

Association of Pension Lawyers

Bernard Casey

CMS

Con Keating

First Actuarial LLP

Henry Tapper

Hymans Robertson

Institute of Faculty of Actuaries

Intergenerational Foundation

John Ralfe

Kevin Wesbroom

Lane Clarke & Peacock LLP

Mercer

Pensions Administration Standards Association

Pensions and Lifetime Savings Association

Pensions Management Institute

Philip Bennett

Pinsent Masons LLP

PwC

Redington

Roderick Ramage

Royal Mail Group

RPMI Limited

RSA

Sackers

Spence and Partners

The Church of England Pensions Board

The Investing and Saving Alliance

The Society of Pension Professionals

UNISON

Willis Towers Watson

1. As set out in regulation 19 (1)(a) of the draft Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2022 on actuarial valuations. ↩

2. Reporting- of costs charges and other information: guidance for trustees and managers of occupational pension schemes – Oct 2021 ↩

3. Schedule 7 to the draft Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2022 ↩