Collective money purchase schemes introduced by Pension Schemes Act 2021
What you need to know
- The Pension Schemes Act 2021 introduces the legislative framework for collective money purchase (CMP) schemes (previously referred to as ‘collective defined contribution’ schemes).
- In CMP schemes, risks are shared collectively between members. This compares to traditional money purchase (MP) schemes, where the members individually bear the bulk of the risks, such as investment performance and longevity risks, and defined benefit (DB) schemes, where the employer takes on all the risks.
- CMP schemes are being introduced in response to a request from Royal Mail for a change in the law to enable it to set up such a scheme. CMP schemes will be subject to authorisation and supervision by The Pensions Regulator (TPR).
- The Department for Work and Pensions (DWP) plans to consult on draft regulations giving further detail in early summer. However, the Government has not yet confirmed a date when the legislation enabling CMP schemes will come into force.
- It is likely that, for at least the near future, CMP schemes will only be an option for large, well resourced employers. It is possible that master trusts will be allowed to be CMP schemes in the future.
Actions you can take
- Assess whether a CMP scheme is now another option for your members if you are considering benefit design.
- If so, investigate further to see what additional detail is in the draft regulations.
- If it does not appear to be an option at the current time, monitor market and regulatory developments in CMP schemes over the next few years.
Brief comparison between MP, CMP and DB schemes
The finer detail: collective money purchase
CMP schemes are MP schemes, with fixed contribution rates for both the employer and members. However, unlike a standard MP scheme, a CMP scheme has a ‘target’ level of benefits set out in the scheme rules, which can be adjusted periodically depending on the amount of scheme assets available. For example, the proposed Royal Mail CMP scheme has a target benefit of 1/80th of pensionable pay for each year of service.
Where non-CMP benefits are also provided (e.g. an accruing cash lump sum on retirement), then assets and liabilities relating to these benefits would have to be kept separate.
CMP schemes must apply to TPR for authorisation. TPR must then assess whether a number of criteria are met, including that:
• persons involved in the scheme pass a ‘fit and proper persons’ test;
• the design of the scheme is sound and the scheme is financially stable;
• the scheme has adequate systems and processes for communicating with members and to ensure that it is run effectively; and
• the scheme has an adequate continuity strategy.
TPR must maintain and publish a list of authorised CMP schemes.
Scheme actuary and actuarial valuations
Trustees of a CMP scheme must appoint a scheme actuary, who must carry out an annual valuation of the scheme’s assets and target benefits (and certify that the calculations are in line with the scheme rules). This valuation should determine whether an adjustment to the target benefits is required, and, if so, how much that should be. Where an adjustment to scheme benefits is not made in line with the scheme rules, this must be reported to TPR.
Initially, only single or associated employers may use a CMP scheme, which means that master trusts may not be CMP schemes. The Government has said that it plans to introduce CMP provisions slowly and will formulate legislation for other CMP models (such as master trusts and decumulation-only vehicles) once the Royal Mail CMP scheme has been set up.
The pensions taxation regime will be amended to cater for CMP schemes. Broadly speaking, they will be valued in a similar manner to DB pensions for the purposes of both the annual and lifetime allowances.
Members of CMP schemes will have a statutory right to transfer out (as they will need to be able to transfer out in order to take advantage of the pension freedoms). The Government has previously stated that it is convinced that a ‘share of fund’ approach is the best mechanism for calculating CMP transfer values.
Possible benefits and drawbacks
CMP schemes may be able to invest at lower cost through the benefits of scale, and also have an investment allocation skewed towards higher return assets over the members’ lifetime than is typical in existing MP schemes. They may also be able to avoid the cost of accessing the insurance market through the pooling of longevity risks between members. On the other hand, there is uncertainty around the benefits that will ultimately be provided, so care with member communication will be required. It may also be difficult to achieve inter-generational fairness for members. Finally, at least initially, it is likely that CMP schemes will only be an option for large, well-resourced employers.