Draft Occupational Pension Schemes (Collective Money Purchase Schemes) (Amendment) Regulations 2023
(9 months, 3 weeks ago)
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The Parliamentary Under-Secretary of State for Work and Pensions (Paul Maynard)
I beg to move,
That the Committee has considered the draft Occupational Pension Schemes (Collective Money Purchase Schemes) (Amendment) Regulations 2023.
It is a pleasure to serve under your chairmanship, Mrs Harris. The instrument clarifies requirements on trustees of authorised collective money purchase schemes, which are more commonly known as collective defined contribution or CDC schemes. The Government believe CDC schemes have an important role in the future of pensions in this country. CDC schemes offer members a seamless transition to the regular retirement income that we know many want, without the need for complex financial decisions that many are ill equipped to make.
The Government want to ensure that as many savers as possible can take advantage of the numerous benefits of CDC. By pooling longevity and investment risk across their membership, CDC schemes can shield savers from much of the uncertainty faced by members of DC schemes, which allows the CDC schemes to target higher investment returns. As part of our Mansion House reforms, that will help to unlock capital for our most promising industries and increase returns for savers, supporting growth across the wider economy.
The Pension Schemes Act 2021 provided the legislative framework for single or connected employer CDC schemes to be set up in the UK. Those regulations came into force on 1 August 2022, enabling such schemes to apply for authorisation from the Pensions Regulator. Throughout the development of our policy, the Government have engaged with stakeholders on how best to deliver CDC in the UK and invited challenge and scrutiny. In that vein, we have been helpfully advised that two areas of the current framework do not meet our published policy intent. CDC schemes can only succeed if there is confidence in this new type of provision. The technical changes made by this instrument ensure that prospective schemes are set up to work as we intend from the start.
Turning to the first amendment made by this instrument, the existing regulations make provision in relation to the annual actuarial valuation and benefit adjustment process for CDC schemes. That means that, each year, benefits are reviewed and adjusted where required, so that the value of assets held is in balance with the projected costs of benefits. It is important that a balance is maintained between the value of the available assets of the scheme and the amount needed to provide the target benefits to members on an ongoing basis.
The policy intention is to provide that, where a cut to benefits must be made due to an economic downturn, the trustees of the CDC scheme can smooth the impact of the benefits cuts on members over three years. That is called a multi-annual reduction. The mechanism helps to reduce volatility and to ensure that current and future benefits remain relatively stable, in contrast with individual DC schemes, which have no pension smoothing mechanism. Members of those schemes experience the full impact of falls in investments as they happen, which can lead to a significant reduction in the value of their retirement savings immediately. For savers closer to retirement, that may be unrecoverable.
The intention is that, where a market recovers during a multi-annual reduction, increases in benefits resulting from a subsequent annual valuation would first be offset, in whole or in part, against the remaining planned cuts under the multi-year adjustment before any remaining increase can be applied as an increase to future benefits in the normal way. If we did not do that, the benefits of the recovery would likely go to future pensioners. That would run against our principle that, as far as possible, all members—that is, current pensioners, those who are currently accruing benefits and those who are not contributing, but have rights to a future pension from the scheme—should all share in the upsides and downsides at the same time. The instrument also ensures that information about any multi-annual reduction and subsequent offsetting must be reported to the Pensions Regulator in the actuarial valuation to ensure proper oversight.
The second amendment ensures that, when a scheme winds up, a beneficiary’s accrued rights are transferred to suitable pension schemes or alternative payment arrangements. A key element of the wind-up process is calculating the share of the fund for each person who is a beneficiary at that time. The scheme rules may provide that that person be a member, but could include a spouse, a child or a person financially dependent on the deceased beneficiary. Our intention has always been that if that beneficiary dies during the winding-up period, the pot allocated to them will not be extinguished but be reallocated among their successors, where a scheme’s rules provide for that.
In conclusion, CDC schemes are an important addition to the UK pensions landscape. When well designed and well run, they have the potential to provide a good retirement outcome for members. The draft instrument will provide clarity for schemes moving forward by more accurately reflecting our intent.
Gill Furniss (Sheffield, Brightside and Hillsborough) (Lab)
As usual, it is a pleasure to serve under your chairpersonship, Mrs Harris. The Minister has covered all the technical details, so I will not repeat them, even though they are important to why we will not be opposing the draft instrument.
As we have heard, the instrument makes technical amendments to clarify two areas of regulations relating to collective defined contribution pension schemes. The first is to mitigate the impact on members when reductions to benefits need to be made. The second is to provide clarity on the categories of flexi-access drawdown fund to which accrued rights in a CDC scheme that is being wound down can be transferred.
We will not be opposing the measure, and we hope that it represents a step forward in getting CDC schemes up and running. To date, only one pension scheme has been granted CDC authorisation—the Royal Mail collective pension plan, which my former colleague Jack Dromey worked very hard to secure. The journey up to this point has been challenging, and I commend those in Royal Mail and the union representatives who were able to reach that milestone agreement. It is important that the remaining regulatory hurdles are cleared as soon as possible so that they can actually launch the CDC scheme. I welcome recent progress in that area, particularly from the Department for Work and Pensions side. However, I understand that new tax legislation and guidance is still outstanding. I hope that will be resolved in the upcoming Budget. From his conversations with colleagues in the Treasury, could the Minister confirm whether that is the case?
To conclude, we support efforts to get CDC schemes off the ground as soon as possible, so, as I have said, we will not oppose the draft instrument. I know that many in the pension sector are eagerly awaiting the launch of the Royal Mail scheme; I hope that that is now in the very near future, and I look forward to seeing its progress.
Paul Maynard
I echo the hon. Lady’s comments on Royal Mail, the late Jack Dromey and the Communication Workers Union ushering the CDC initial vehicle almost to its delivery. I think it is coming very soon—in just a few weeks, if not months.
I can confirm that we have worked closely with the Treasury to ensure that we get in place all the wider regulations needed, particularly for multi-employer trusts, which are slightly more complex than Royal Mail, and indeed even those that might cover a whole profession with a range of similar characteristics. That work is ongoing with the Treasury, and I stress that the draft regulations are part of it. On that note, having answered that point, I commend the regulations to the Committee.
Question put and agreed to.