Regulator’s CDC plans risk strangling the sector at its birth

TPR published a consultation on its draft code in January, detailing the administrative, governance and IT systems that will have to be in place and operational at the time any application to create a CDC scheme is filed, placing particular emphasis on the quality of member communications.

Although the code is currently designed solely with single-employer arrangements in mind — the regulator hopes to begin accepting this type of CDC application from August — the Department for Work and Pensions had confirmed it has begun engagement on the prospect of multi-employer schemes, and it has been suggested that TPR’s draft code could form the basis for regulations covering those schemes as well.

The code also sets out a number of reporting requirements, both to members and trustees, which will have to be satisfied if the prospective scheme is to satisfy the regulator.

We would encourage TPR to update the industry on developments in their expectations as the first schemes progress through the authorisation process, perhaps via informal routes such as blogs if this allows information to be published sooner. This will ensure the industry is aware of the latest expectations

Peter Williams, ACA

TPR’s code places significant emphasis on member communications, deemed especially important for CDC schemes given they are unfamiliar, complex, and benefits can go down as well as up.

It also proposed a £77,000 application fee for the ‘primary section’ of any CDC scheme, while the code’s various requirements entail a substantial cost outlay on staff and administrative systems, all of which must be in place and ready to go live at the point an application is filed.

Demands are ‘significantly too onerous’

Though broadly supportive of the intent behind the proposals and keen to see CDC debut in the UK, various industry bodies criticised the code, arguing that the demands it places on prospective schemes are too onerous and risk prohibiting growth in the sector.

The Pensions and Lifetime Savings Association said it was important that prospective CDC schemes meet a high standard, currently based on that applied to DC master trusts, but suggested there were areas “where the criteria could be more proportionate and slightly less prescriptive, given these rules only apply to single-employer schemes”.

The PLSA argued that the £77,000 application fee was prohibitively expensive given the substantial costs already incurred in setting up CDC schemes, which must have capital reserves set aside on day one to cover two years’ running costs and the potential cost of winding up.

It said this could put employers off, given DC schemes are cheaper and future CDC master trusts could also be a more attractive proposition.

A lack of flexibility in the requirements around systems and processes could likewise put off prospective employers, although the PLSA added that modern administration systems should be able to cope.

The Society of Pension Professionals was somewhat more trenchant in its opposition to the draft code, however, warning in its consultation response that “the demands and hence cost of the code of practice are significantly too onerous”. 

“As drafted, it risks repelling any nascent interest in CDC on the part of single employers, due to the level of detail. We expect that outcome to be the probable, unintended consequence of such a draft, which may negatively impact the future of CDC,” it said.

The SPP argued that the authorisation requirements set out in the code “are excessive”, and suggested that in areas where the risks in CDC schemes do not exceed those in typical defined benefit schemes, the requirements should likewise not exceed those applied to these pension funds.

It added that, although it might be understandable to apply especially high standards to the first few CDC schemes set up, TPR should consider reviewing the code and its requirements “as they and CDC trustees gain experience”.

Member communications requirements drew particular ire, with the SPP describing them as “very extensive and too onerous”, more so even than for DC master trusts.

“This seems disproportionate given the need for DC members to make significant investment, disinvestment and decumulation decisions, which are not necessary for CDC members,” it said.

It argued that reports should be “much less regular” than set out in the draft code, no more than annually for trustees and triennially for members.

Trustees could be too conservative

In its own response, the Association of Consulting Actuaries echoed concerns about requirements around authorisation and member communications.

In a response shared word for word with the SPP, the ACA suggested that the regulatory regime should be focused on “ensuring that benefit adjustments are set at a sensible level each year, that member communication is not misleading, and that there will be sufficient funds in the event of a future wind-up”. 

“In other areas — particularly where the risks are similar to or less than a typical DB scheme — we would suggest that the regulator should not require more than it asks of DB scheme trustees and scheme sponsors. It would therefore be helpful for TPR to clarify in the code that it will take a proportionate approach in these circumstances,” it said.

The ACA raised particular concerns around the unintended consequences arising from statements the code makes about “conduct of individuals involved in the scheme”.

Specifically, the requirement that individuals “have acted to reduce the likelihood of an adverse event recurring”, and that there are “mitigations to any adverse events with relevance to the role, including frequency, severity, impact and explanation offered”, risked compelling trustees to be unduly conservative in their investment strategies, the ACA warned.

“It is unlikely to be appropriate for CDC scheme trustees to focus exclusively on reducing risks of adverse events when setting their investment strategy. In relation to the wording above, TPR should clarify that the actions/mitigations therefore only relate to operational risks, rather than investment strategy,” it continued.

“It would also be unfortunate if the requirements set the bar so high that it was difficult to achieve inclusion and diversity aims for the trustee board as a whole — for example, including younger, less experienced trustees.”

Peter Williams, chair of the ACA Pension Schemes Committee, said: “We would encourage TPR to update the industry on developments in their expectations as the first schemes progress through the authorisation process, perhaps via informal routes such as blogs if this allows information to be published sooner. This will ensure the industry is aware of the latest expectations.”