Occupational Pension Schemes (Collective Money Purchase Schemes) (Amendment) Regulations 2023

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Occupational Pension Schemes (Collective Money Purchase Schemes) (Amendment) Regulations 2023.

My Lords, I am pleased to introduce this instrument. Subject to your Lordships’ approval, these regulations will make two small technical amendments to the landmark Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2022 to ensure that they operate in accordance with our published policy. The instrument clarifies requirements on trustees of authorised collective money purchase schemes, more commonly known as collective defined contribution, or CDC, schemes.

I will first set out the context. The Pension Schemes Act 2021 provided the statutory framework for CDC schemes in the UK. The guiding principle of our approach has been to ensure that it protects the interests of members. The Government believe that CDC schemes have an integral role in the future of pensions in this country. CDC schemes offer members a seamless transition from saving to receiving a regular retirement income.

We know that many people do not want, or feel ill equipped, to make complex financial decisions at retirement. 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 the membership, CDC schemes can shield savers from much of the uncertainty faced by members of DC schemes. This also allows the scheme actively to target higher investment returns for their members than a DC scheme through increased investment in growth-seeking assets. This in turn can lead directly to greater investment in vital UK infrastructure and the technologies of the future, such as transport and renewable energy. That is why the Government have provided the legislative framework for single or connected employer CDC schemes to be set up in the UK. The CDC regulations came into force on 1 August 2022.

My Lords, I thank the noble Viscount for his clarification of the papers, which is very welcome—as usual. This is a statutory instrument with a more than usually snappy title, which will probably be more noted than some of the things in the instrument.

This statutory instrument is good news. It helps pave the way, as I understand it, for the introduction of the UK’s first collective defined contribution pension scheme, which I believe is by the Royal Mail. Collective defined contribution schemes in various forms are common in Scandinavia, the Netherlands and Canada. Work on these risk-pooling arrangements started during the coalition years when we, the Liberal Democrats, worked collaboratively with the Labour Front Bench and the Communication Workers Union to get the Royal Mail to implement the first scheme of this sort. I believe that it has not yet gone live, although perhaps the noble Viscount can tell me more about that.

The next developments of CDC, in my view, are, first, the extension of multi-employer or industry-wide CDC—when does the Minister expect to publish the next consultation on this?—and, secondly, the development of retirement-only or decumulation-only CDC schemes, so that a person could take his or her own pot and pool it with other people’s. Any comments on that would be gratefully received.

These regulations tidy up some issues that are causing practical problems. The main part is to do with what happens each year, as the noble Viscount said, when a scheme reviews whether it has enough money to meet its target pension payouts. As things stand, if the scheme is short, it can reduce planned pensions. But what happens if, a year later, it thinks that things are better? What these regulations appear to make clear is that the first thing you do is reduce or eliminate the planned pensions cuts. I think this was covered by the Minister’s comment about “a smoothing mechanism”.

I thank the Minister for setting out the intent of these regulations so clearly and for arranging a briefing session with DWP officials engaged with CDC, who also provided a very helpful briefing document. It probably has reduced the number of questions that my noble friend and I have—although I suspect the Minister will take very little comfort from that observation.

The regulations amend the Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2022, in two key ways. In the first instance, they amend how reductions to members’ benefits in a CDC scheme can be smoothed following a fall in the value of assets held. Given the Government’s opposition to any buffer fund in a collective DC scheme to manage volatility and assets, intergenerational fairness or cuts in benefits, clarity on how the legally permitted smoothing mechanisms operate is indeed important.

The 2022 regulations require benefits in a CDC scheme to be adjusted annually, including cuts, to keep that value of assets held and the projected costs of benefits in balance, and there are strict rules on annual benefit adjustment to ensure that all members, including pensioners, are subject to those adjustments. These regulations are inevitably complicated. Where a large cut to benefits is required due to falls in the value of the assets held, those cuts can be smoothed over a maximum of three years via the multiannual reduction provision. Indeed, there can be more than one multiannual reduction in place, given that valuations are required annually and asset values can continue to fall.

The government intention, which we all understood, was that where there was a bounce-back of asset values during a period of benefit reduction, then, subject to that annual valuation, the bounce-back in value could be offset against those benefit cuts. But clearly, the problem is that the wording of the 2022 regulations does not accurately allow for such an offset and these regulations will, which is welcome. These regulations also seek to clarify—I have some questions—how offsetting would work where there is more than one multiannual reduction in place. One could easily anticipate that, in a period of economic downturn or economic crisis, you could have two, or even three or more, multiannual reductions in place.

I will ask the Minister three questions so that I or the reader can clearly understand the regulations. First, is there any actuarial threshold on the level of benefit cuts required to keep assets and benefits in balance before the full three years are allowed for a multiannual reduction being deployed? Is there a trigger? Is there a level of cut before the whole three years can be taken?

Secondly, Regulation 3(5) states, with complicated wording:

“Any offsetting increase … applied to the remaining years of”

one or more multiannual reductions

“must not be greater than the total reduction … in the previous year of the multi-annual … reductions”.

In simple terms, what does that mean for the front-ending or back-ending of any offset over the remaining years of any multiannual reduction in place? Front or back-ending could have quite a significance.

Thirdly, if a member transfers out their benefits before the full multiannual reductions are made or the offsets from bounce-back have been applied, how will that be captured in the calculation of their transfer value? One of the challenges under CDC is how one calculates transfer values fairly for people exiting the scheme.

I will make specific reference to the Royal Mail CDC scheme, which is the only one that has been signed off by the regulator, although it has not yet been implemented. In my mind it triggered a series of questions which I should like to put to the Minister. This is what prompted the questions. Under the Royal Mail scheme, are there any qualifying thresholds of either income or length of service—for example, one year of working for the company—before a worker in Royal Mail will be eligible to join the CDC scheme, and if such a qualifying threshold applies to workers who are otherwise eligible for auto-enrolment, which scheme will Royal Mail auto-enrol them into? That is not unique; other employers use that concept, referred to as a “nursery scheme”, before people join the bigger company scheme. However, when a Royal Mail worker reaches the qualifying threshold, will they be auto-enrolled into the CDC scheme, with their contributions to the nursery scheme ceasing, or must they individually opt into the CDC scheme?

If it is the latter and the onus is on them—that is, to get into the CDC scheme and out of the nursery scheme, they have to opt into it—future new Royal Mail workers will never be auto-enrolled into the CDC scheme. It will always be an opt-in situation, which is of course quite contrary to the thrust of public policy. These questions are relevant to any employer-supported CDC scheme that is accompanied by a nursery scheme for new workers.

These regulations amend Schedule 6 to the 2022 regulations, which are particular concerned with protecting members where a CDC scheme is wound up. However, the 2022 regulations make no reference to allowing the value of accrued rights for dependants, nominees or successors to be transferred into their choice of flexi-access draw-down fund—their pot, where the money is put—so that they can access it directly. It refers only to transfers to the member’s flexi-access fund. Obviously, the amendment to Schedule 6 to the 2022 regulations—captured in these regulations—corrects that and allows for such transfers. Can a dependant or nominee ask for such a transfer to their own choice of flexi-access draw-down fund before the wind-up is completed or validated, particularly if the dependant has an urgent financial need? From my human experience of dealing with these situations, that occurs quite frequently. If so, what does that mean for the calculated value of the benefits transferred? I am sorry if these questions are all rather dry but they concern the kinds of issues that regularly come up when one is trying to run a pension scheme.