TPR to accept CDC applications from August

The draft code, published on Tuesday, builds on work previously carried out by the Department for Work and Pensions, and sets out TPR’s extensive authorisation and supervision regime.

It details the administrative, governance and IT systems that will have to be in place and operational at the time any application is filed, placing particular emphasis on the quality of member communications.

It 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.

The introduction of this type of scheme will threaten some established vested interests, and CDC’s expansion outside single-employer arrangements might spark something of a turf war within the workplace pensions sector

Tim Middleton, PMI

David Fairs, TPR’s executive director of regulatory policy, analysis and advice, said: “CDC schemes have the potential to change the pensions landscape by offering savers and employers a viable alternative to traditional defined benefit and defined contribution schemes.

“The draft code focuses on requirements that employers and trustees considering establishing a CDC scheme need to plan for now. We will be revisiting the code to expand on our expectations for the closure or wind-up of a scheme in due course. We will also be producing accompanying guidance.”

Communications will ‘make or break’ CDC

The consultation sets out in detail what TPR will look for when judging the quality of member communications.

This has long been seen as crucial to the success of CDC schemes, which are more complex than existing pension arrangements and entail the possibility that benefits may go down as well as up, something members will need to be made aware of.

“Clear and accessible information for members on how their benefits may increase or decrease will be crucial. We expect there to be a focus on producing member communications, as well as the IT functionality needed,” the consultation explains.

In its assessment, TPR will look at whether prospective schemes have proper communication teams in place, as well as comprehensive plans that allow for annual reviews and member feedback. 

The plans must also include a requirement to report back to members “at least annually”, summarising feedback and detailing where changes have or have not been made. Quarterly reports will also have to be made to trustees summarising member feedback, and setting out how it has been considered and what (if any) action will be taken.

Matthew Arends, partner and head of UK retirement policy at Aon, said: “Quite rightly, the importance of member communications features strongly in the draft guidance, with a requirement for a person with appropriate expertise to have specific accountability.

“What may also be relevant to both DB and DC pension schemes is the requirement for processes for gathering, considering and, if appropriate, acting on member feedback on the communications. Could this be a sign of things to come for all pension schemes?”

Mark Ormston, chair of the Pension Administration Standards Association’s industry policy committee, added: “The draft highlights key areas to be communicated, such as the methods by which the scheme determines rates, current rate estimates, and any potential future benefits which are subject to annual adjustment.

“These can be tricky areas to cover and typically involve the inclusion of multiple caveats. These topics will need to be worded in plain English to be easily understood by members, and this is where the member feedback elements of the code become particularly important,” he said.

“It will be invaluable to listen to members’ views and explanations of all the pension income options being communicated and, in particular, how CDC is played back and understood when compared with options such as an annuity and drawdown. For the first CDC offerings, it is these communications (at the point of supposed pension access) which will likely make or break the CDC offering.”

Authorisation is expensive

Besides the application fee — £77,000 for the ‘primary section’ — the requirements laid out entail substantial cost outlays on staff and administration, with TPR expecting all administrative processes, including IT systems, “to be fully developed and ready to go live at the point of application”.

IT systems will need to be able to “process transactions and annual events automatically and securely”, increasing or decreasing benefits where required and be able to record and store all relevant member records.

Member communication teams will need to be hired, and a “governance map” will need to be drawn up that “identifies and documents all the functions the trustees think relevant”, including administration, investment, risk and actuarial matters, each of which will need “accountable persons” allocated to it.

Arends said: “CDC schemes won’t be particularly cheap to set up, given the planning required as well as the authorisation process. But CDC schemes will be large, and so the cost per member will be more reasonable.

“However, a big part of the costs will come from the need for the scheme to reserve for wind-up expenses from its inception, even though wind-up is likely to be decades in the future.” 

He said it was “disappointing” that there will not be a “grace period” over which these reserves can be built, adding: “The DWP’s wind-up process is overly onerous in our view and adds to costs. We think this is an area where the DWP and TPR can work in tandem to ensure protection for members — and without costs becoming a hindrance to CDC schemes being launched.”

James Riley, president of the Society of Pension Professionals, told Pensions Expert that “extensive” compliance costs would likely limit CDC “to only the largest schemes”, which is why multi-employer CDC — where costs can be shared — “will be key to its success”. 

The fact that initial rollout will be limited may lessen fears of a capacity crunch in the industry, however.

Tim Middleton, director of policy and external affairs at the Pensions Management Institute, said: “There is plenty of capacity within the pensions industry to accommodate CDC.”

But he added: “The introduction of this type of scheme will threaten some established vested interests, and CDC’s expansion outside single-employer arrangements might spark something of a turf war within the workplace pensions sector.”

Guidance must develop

Pensions minister Guy Opperman has said that work to expand regulations to include multi-employer schemes is under way, and on Tuesday Fairs reiterated that point.

“The Pension Schemes Act 2021 contains powers to enable further developments of the CDC market, such as multi-employer schemes. We look forward to working with the DWP and industry on any development and expansion of CDC schemes,” he said.

Aon partner Chintan Gandhi said he was “very keen” that multi-employer CDC schemes and master trusts offering CDC be accommodated, “because they will permit the millions of UK workers who do not work for the largest employers to take advantage of CDC pensions”. 

“However, today’s draft TPR guidance and the DWP’s regulations will need to be extended for this, in particular to permit CDC designs where accrual of benefits can vary by age in a single section of the CDC scheme,” he explained.

“For CDC master trusts specifically, appropriate checks and balances on the representation of CDC benefits will need to be included in order to ensure there is no mis-selling of the benefits of CDC.”

LCP partner Steven Taylor likewise said that the regime “will need to develop” to encompass other CDC arrangements.

“It’s good news to see further progress on the CDC front, but the new consultation does place a lot of focus on the style of scheme favoured by Royal Mail,” he said. 

“This means the draft code may not currently support all of the features envisaged by other employers wishing to go down the CDC route, and will need to be updated over time to accommodate them.

“We expect this to be a key focus in many of the industry responses. That said, the consultation does provide some important new detail about the information required for authorisation, which will be helpful for other companies in their own preparations.”