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Article | Benefits Hot Topics

DWP publishes response on final CDC regulations

December 17, 2021

The DWP has published final regulations allowing single and connected employers to set up collective defined contribution schemes.
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The Government has published its response to its consultation on draft legislation to allow an employer, or group of connected employers, to set up collective money purchase (CMP) schemes ꟷ also known as collective defined contribution (CDC) schemes ꟷ alongside a final draft version of the regulations. The principal set of regulations will be laid before Parliament this month, with the regulations that make consequential amendments to other parts of pensions legislation following in February 2022, and both expected to become effective from 1 August. The Department for Work and Pensions (DWP) consulted on the draft versions in July and has now made both final versions public.

The modest changes to the regulations are intended to ensure they align with the policy intention, so have not fundamentally altered from those consulted on. Among the changes is a re-drafting of the definition of a connected employer to bring it into line with the policy intent and to remove potential confusion in relation to a ‘joint venture’. While a number of respondents had suggested changes to make the regulations work with multi-employer schemes, the DWP thought such changes carried risks for employee protection and instead proposes to carry out further work on separate regulations before allowing CMP schemes for industry-based multi-employer schemes, decumulation-only vehicles and commercial master trusts. The Government appears committed to introducing master trust legislation, with the Pensions Minister announcing that he has no doubt that “millions of pension savers will benefit from CDCs in the years to come”.

Within the scheme design section of the regulations, the DWP have resisted calls to include a definition of “soundness”, but it has made changes to clarify what it expects the scheme actuary and trustees to have considered before a scheme is evaluated by TPR to assess whether or not it is sound. TPR has responsibility for authorising CMP schemes, and soundness is one of a number of areas where more details will be contained in a draft Code of Practice and operational guidance to support employers in January 2022.

There is also a revision to clarify that DWP expects “the scheme actuary to be satisfied that the actuarial advice being used to underpin key communications is properly used”; while this may involve ensuring that the annual benefit statement template is checked, it does not extend to every member communication. Changes have also been made to benefit statement requirements to be more explicit about the amount of benefit that the member has built up at the illustration date and how this represents the member’s share of the available assets of the scheme. Moreover, benefit adjustment notifications have been removed from the annual statement and will now need to be provided separately.

The Government has made changes to how valuation and benefit adjustments can take place. Again, the fundamental approach remains the same but with some refinement as to how those judgements are made. They have also sought to provide greater clarity in relation to the application of multi-annual reductions – the policy intention is to allow smoothing of planned reductions to mitigate the impacts on members while allowing for normal fluctuations caused by investment returns and longevity experience.

The Government is also proceeding as proposed in relation to the way TPR’s authorisation fees are structured, the level of the fee and how the fit and proper persons requirement (which is expected to be covered in the guidance from TPR) operates – it is not expected to preclude member-nominated trustees from having, or achieving, the appropriate expertise.

The lion’s share of legislation is now laid for single employer CMP schemes and will come into effect on 1 August 2022. TPR’s draft guidance is due to follow for consultation in January and draft consequential regulations will follow in February, meaning the path is clear for single employer schemes but with more work needed for industry-wide alternatives.

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