The UK will soon see the launch of its first occupational collective money purchase (CMP) scheme, courtesy of Royal Mail. The employer has recently announced its intention to launch the scheme in 2022 (some years after it first announced its intention to explore this model) after significant involvement with the DWP and other industry bodies in developing the CMP model over the past few years. A consultation on the proposal is currently open and closes on 21 November 2021. In light of this, we take a look at some of the key features of CMP schemes.
The background
Royal Mail's announcement follows a consultation process by the Department for Work and Pensions (DWP) on the draft Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2021 (the "Regulations"), which opened on 19 July and ended on 31 August 2021. The Regulations would bring into force the relevant provisions of the Pension Schemes Act 2021 which set out the legislative framework for CMP schemes (although these are not yet fully in force).
What is a CMP scheme?
A CMP scheme is a new type of money purchase pension scheme that can be set up under trust either by a single employer, or a group of connected employers. It operates in a similar fashion to defined contribution (DC) schemes, with the key difference being that the scheme member owns a proportionate share of the collective scheme assets as opposed to an individual share. Thus, the risks associated with the scheme are assumed by the whole scheme membership, rather than by members as individuals (as in traditional DC schemes) or by the employer (as in defined benefit schemes). However, as with DC schemes, the main disadvantage is a lack of certainty around the level of retirement pension a member will receive. The benefit provided will depend on the performance of the fund's investments and may consequently fall short of members' expectations (although, of course, the fund could also perform better than expected!).
What is a connected employer?
A CMP scheme must either be run by a single employer or a group of two or more 'connected' employers. Under the Regulations, there are a range of circumstances where employers will be connected. These include where one employer employs scheme members jointly with another, where one employer holds or controls (or has done in the previous 6 months) at least 33% of the voting power in the other employer, or where one employer is (or has been in the previous 6 months) engaged in a joint venture with another. Employers are also connected where they have separate legal identities, but their structure means that the economic position of the shareholders of each is the same as if they held shares in a single company combining their respective business. Finally, employers are connected following a transfer of active members of a scheme from one to another.
The DWP have also expressed their intention to extend CMP schemes to non-associated multi-employer schemes in the future, which is permitted under the 2021 Act.
Authorisation by the Pensions Regulator
In order to operate, the scheme must be authorised by the Pensions Regulator (TPR) and will be supervised by TPR following its establishment on an ongoing basis. This will necessitate payment of an authorisation fee to TPR, as well as submission of supervisory returns and notifications about 'significant events' (defined in the Regulations).
In order to obtain TPR authorisation, the persons involved in the scheme must be fit and proper persons. The scheme design must also be sound, which is to be shown through a viability report prepared by the trustees and a viability certificate provided by the scheme actuary. In addition, the scheme must be financially sustainable, have adequate systems and processes for communicating with members and others and have an adequate continuity strategy. Finally, the systems and processes for running the scheme must be sufficient to ensure it is run effectively.
Next steps
Further guidance in the form of a code of practice from TPR is expected to follow to assist employers who may wish to set up a CMP scheme. It is anticipated that employers who have closed their defined benefit pension schemes to future accrual may wish to explore the option of offering a CMP scheme as their designated pension provision.
If you would like to discuss anything raised in this blog, please get in touch with a member of the pensions team or your usual contact at Brodies.
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