CDC - a new dawn

In the slow moving world of pensions, the week commencing 7 October 2024 was a big week. 

On Monday, we saw the launch of the Royal Mail Collective Defined Contribution (CDC) scheme, an event that has been years in the making, and made possible through the single and connected employer legislation in the 2021 Act and 2022 regulations.

On Tuesday, the DWP published their much anticipated consultation on draft legislation for unconnected multi-employer whole of life Collective Defined Contribution schemes (I know, catchy). For CDC to move beyond an opportunity reserved for a relatively small number of very large employers, to a mass market pension design widely available in the UK, this legislation is key. 

There are two main potential types of future unconnected multi-employer CDC schemes: 

1. A sector specific scheme – in industries that have a large number of similar employers, like areas of transport or the care industry, with a scheme potentially operating on a non-commercial basis. 
2. Commercial CDC schemes are set up to take a wide range of different employers for profit, much like the DC Master Trusts do today.

While there are different risks and dynamics in both of the above, the draft legislation is designed to cover all scenarios and safeguard future members. 

Three things stood out in particular. 

1. Authorisation and operation 

Much like the DC Master Trust authorisation regime, the legislation seeks to ensure all CDC schemes have: 

• sufficient financial resources and well considered strategies to meet the costs of setting up and running a CDC scheme; as well as: 
• financial reserves to cover costs associated with the occurrence of a “triggering event” (ie in the event the scheme cannot continue);  
  robust systems and processes;
• sustainability and continuity plans;
• effective scheme design; and
• sales and marketing controls.

For providers looking to enter the market, evidencing this and demonstrating it operates under a robust governance framework, is the job ahead.  

Having supported DC Master Trusts in their development and authorisation process, we recognise the substantial effort this process will involve. This is correct, a robust assessment model with a very high bar for new schemes is essential to the long term success of CDC.  

Over time there will be schemes who cannot continue. As far as possible the legislation is designed to prevent this happening, through the requirement for a continuity strategy. But it is inevitable that for some, wind up will be necessary.    

To protect members and instil confidence for employers considering CDC, an additional safety net should be established. This could involve one or more schemes serving as a vehicle for members from CDC schemes that are required to wind up.  

These could be run by commercial or non-commercial entities so long as they have the scale, resources and remit to carry out this role for the long term. Members would benefit from knowing that their pension CDC pension provision would be much more likely to last their lifetime. A desirable characteristic for a pension! 

There would be other advantages from this model, for example, requirements on the scheme to accept members who might not otherwise be able to access CDC. 

While not considered in any form in this consultation, it’s an area to follow as the industry responds. We need the Government to legislate, not just so we bring CDC to life at scale, but so the path is cleared for employers and the industry to want to do it and be able to do it well. For the long term. 

2. Scheme design

CDC is a mechanism for pooling risk. By its very nature it involves cross subsidies between members of the pool. This introduces intergenerational risk transfer considerations, with the consequences amplified in a world in which you have different employers in the same pool.   

How the scheme is designed to address this fairly, along with the process for valuations and benefit adjustments over time, are fundamental and we will explore the way these are tackled in a separate article shortly. 

It’s striking how different the requirements are for multi-employer schemes to the single employer rules in place today.  The consultation proposal allows for a lot less intergenerational value transfers than in the original rules. It makes us wonder what’s driving that, and whether the original regulations themselves might be updated to reflect this latest policy thinking. For large employers, it will pose an interesting question on the relative merits of a single scheme CDC or master trust CDC approach.  

3. Promotion and marketing  

With the prospect of commercial CDC schemes competing to win appointments from a large number of employers, the legislation sets out to manage the risk of overpromising on benefits and misselling.  

For this reason, a clear separation is required between:  

• the proprietor, who would be responsible for this activity and that it is carried out in good conduct; and
• the Trustee, who’s responsibilities would be separate to this.

In overseeing the CDC regime, the Pensions Regulator will need to monitor and take into account whether any marketing or promotion of the scheme has been unclear or misleading.  While a sensible control on poor behaviour, this will be a challenging duty for the Regulator to fulfil. Knowledge and experience from the Financial Conduct Authority might be helpful in this regard. 

For the pensions industry, this moment could be seen as a point of profound change. And for generations of future DC savers, this could be a very good thing.

If you would like to discuss in more detail, please get in touch. 

 

This blog is based upon our understanding of events as at the date of publication. It is a general summary of topical matters and should not be regarded as financial advice. It should not be considered a substitute for professional advice on specific circumstances and objectives. Where this blog refers to legal matters please note that Hymans Robertson LLP is not qualified to provide legal opinion and therefore you may wish to obtain independent legal advice to consider any relevant law and/or regulation. Please read our Terms of Use - Hymans Robertson.