The watchdog laid its CDC code before parliament on June 9, giving it enough time to pass through the legislature for CDC applications to begin from August 1.
The code is expected to be made after it has laid in parliament for 40 days.
CDC schemes will first be limited to those created by single employers, or two or more connected employers. The Pension Schemes Act 2021 allows for further developments of the CDC market, such as multi-employer schemes.
“We have seen the positive effect of CDC schemes in other countries and this code brings us one step closer to making them a reality here at home,” pensions minister Guy Opperman said.
TPR also published its response to an eight-week consultation over the code that ran from January to March this year, having received 24 responses.
It has pledged to issue guidance on fitness and propriety criteria, and how fees are calculated for authorising additional sections of a CDC scheme.
A disproportionate level of detail?
The PSA21 introduced the authorisation and supervisory regime for CDC schemes, while the Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2022 set out expectations for TPR when it authorises schemes, along with the information it should receive for applications and during supervision.
Consultation respondents noted the level of detail in the code, questioning if this detail was proportionate for single employer schemes, or whether it was more appropriate for multi-employer schemes, the regulator said.
Fears were expressed that its “onerous” nature could act as a barrier to multi-employer and smaller schemes.
The watchdog maintained that the level of detail within the code was necessary, though it has made a number of clarifications.
For example, TPR will not expect newer trustees to meet the same competency threshold as their more experienced counterparts. New trustees will need to have completed basic training and have frameworks for continued development.
Those that have previously been appointed to trustee roles, however, will have to have gained “sufficient equivalent knowledge through previous experience as a trustee or in a senior role in a comparable scheme”, it said.
Experienced trustees will also need to have accreditation with either the Association of Professional Pension Trustees or the Pensions Management Institute.
“A small number of respondents said that they didn’t believe we should be assessing individuals who appointed or removed trustees. However, we are required to do this by the PSA21 and so have retained this in the code,” the regulator said.
TPR acknowledged concerns over requirements to report on member feedback to trustees, which has been viewed by some as an expectation to actively seek savers’ views every quarter.
“We’re not expecting schemes to develop a significant number of member communications as this could lead to overload and, as a result, a negative effect on member engagement,” the regulator said.
“However, we expect communications to provide enough information for members to understand how the scheme operates, and easily access more information if they choose.”
TPR does not expect schemes to obtain quarterly member feedback.
Excessive expectations on financial reserves are gone
The regulator has also watered down requirements on setting up costs and financial reserves.
Schemes had originally been expected to hold financial reserves in case of a “triggering event” as part of the authorisation process. Consultation respondents had questioned the need to hold reserves, or whether these reserves could be built up over time.
The original CDC legislation, meanwhile, required applications to contain details of set-up costs.
TPR said that any dilution of its expectations over financial sustainability “could expose savers’ benefits in those schemes to greater risk following a triggering event”.
It has, however, accepted that for many schemes, much of their set-up costs will have been incurred by the point that trustees apply for authorisation.
“We can confirm that any setting-up costs that have been incurred and settled by the employer need not be included in an application,” the regulator said, adding that applications must still include details of costs incurred but not yet settled, and any still expected to be incurred.
TPR has also removed the requirement for trustees to maintain reserves larger than “the already prudent reserves that they would have calculated”.
“As this expectation created further additional prudence on already prudent calculations and asset haircuts, we agreed that this measure was excessive,” it said.
Investment contingency plans removed
The regulator acknowledged that the majority of consultation respondents believed that it had not provided a definition of “sound scheme design”, which applicants must be able to demonstrate as part of the authorisation process.
“At this point in the development of CDC schemes, it would be inappropriate to define soundness tightly,” TPR said.
“Given the intent reflected in the regulations, it would be inappropriate for us to narrow the [Department for Work and Pensions’] policy intent.”
It believes that “reasoned conclusions on the tests in regulations, supported by a sufficiently robust evidence base”, should be enough to evidence soundness of design.
The regulator has removed the expectation on trustees to have contingency plans in response to periods of weak investment performance.
It also confirmed that it does not expect new schemes to set out plans for continuing to operate as a closed scheme when applying to the regulator. It does, however, expect trustees to weigh up when this could become a viable option, scheme rules permitting.
Darren Philp, director of policy and market engagement at Smart Pension, acknowledged that TPR had taken consultation responses on board, without making any radical changes from the original proposals.
“I know some have argued that it is too onerous but it’s got to be right that these schemes are held to high standards given the nature of the benefits they will be providing,” he said.
“Better to set the bar high and get it right at the start, rather than have the situation when master trusts got traction at the start of AE, where it was like the Wild West.”
Alex Janiaud is deputy editor at FT Adviser's sister publication Pensions Expert
