PTM023450 - General principles: arrangements: collective money purchase arrangements

Collective money purchase arrangements are a sub-category of money purchase arrangements, and are something of a halfway house between defined benefits and money purchase. They were introduced by the Pension Schemes Act 2021.

The only pension that a collective money purchase arrangement can pay to a member is a scheme pension. The only pension death benefit that can be paid is a dependants’ scheme pension.

Members’ collective money purchase funds are pooled; the amount available in the fund to provide benefits is for all the members collectively.

One distinctive characteristic of a collective money purchase arrangement is that the benefits can increase or decrease significantly from year to year.

The benefit will be valued broadly on the basis of the value of the investments and the member’s length of service. For example, a member may build up a unit worth £1,000 in one year but the following year the value of the units may increase so that the member now has two units but each is valued at £1,050, providing the member with pension rights totalling £2,100. However, the following year the value of the units may decrease so that the member has three units at £1,010 each, totalling £3,030. This revaluation exercise impacts all members including active members and ‘deferred’ members if they do not start to take their pension, or ‘pensioner’ members if they do.

A collective money purchase arrangement is treated differently to other types of money purchase arrangement where it is necessary to value a member’s accrued, but uncrystallised, benefits under an arrangement. There are separate provisions solely covering valuations for collective money purchase arrangements, for example, for certain lifetime allowance enhancement factor, borrowing, surcharge and transitional protection provisions.