Occupational Pension Schemes (Collective Money Purchase Schemes) (Extension to Unconnected Multiple Employer Schemes and Miscellaneous Provisions) Regulations 2025

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Occupational Pension Schemes (Collective Money Purchase Schemes) (Extension to Unconnected Multiple Employer Schemes and Miscellaneous Provisions) Regulations 2025.

My Lords, I am pleased to introduce this instrument. Subject to the approval of this Committee, these regulations will be another significant step forward in the reform of our occupational pensions framework, building on the foundations laid by the Pension Schemes Act 2021 and the Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2022. The primary purpose of these regulations is to extend the legal framework for collective money purchase schemes—commonly known as collective defined contribution, or CDC, schemes—to allow multiple unconnected employers to participate. Until now, CDC schemes have been restricted to single employers or groups of connected employers.

I have been advised that there are two minor drafting errors in Schedule 2 to the SI as laid in draft, resulting in two cross-headings before paragraph 2 where there should be only one and a repetition of “regulation” in paragraph 2. The intention is for these to be corrected in the version that is made so that there is a single cross-heading reading “General” and a single appearance of the word “regulation” in paragraph 2. I apologise for these errors, but I assure the Committee that these corrections do not change the legal meaning of Schedule 2 in general or paragraph 2 in particular.

Before I move on to the detail of this instrument, it may be helpful if I give some context. The Pension Schemes Act 2021 provided the statutory framework for CDC schemes in the UK. The Government believe that CDC schemes have an integral role to play in addressing the challenges faced in our pensions system, so long as the guiding principle is to ensure that we protect the interests of members. Although good progress has been made, four in 10 working-age people are under-saving for their retirement. CDC schemes can help address this issue: by pooling longevity and investment risk across the membership, such schemes have the potential to target higher investment returns for their members than a DC scheme. CDC schemes also have potentially infinite investment horizons and no need to lifestyle investments, which means they can invest productively for longer. Industry modelling suggests that CDC schemes could boost retirement income by anywhere between 25% and 60%. The Committee will agree, I am sure, that if such increases in returns were realised, CDCs could really help address the issue of inadequate retirement incomes.

Part 4, including Schedules 1 to 6 to this instrument, implements the new authorisation and supervisory regime for unconnected multiple employer collective money purchase schemes under Part 1 of the 2021 Act. It includes regulations on the application for authorisation, scheme design, financial sustainability, the valuation and adjustment process essential to calculating benefits and the supervisory regime for unconnected multiple employer collective money purchase schemes—both at set-up and on an ongoing basis.

A combination of the 2021 Act and these regulations stipulates the actions trustees must take if a scheme experiences a triggering event. These are certain events set out in the primary legislation that can pose a threat to the future of the scheme and the interests of members. If a triggering event occurs, the trustees must take certain actions. The new regime will continue to place strong emphasis on regulatory oversight. The Pensions Regulator is empowered to issue risk notices, enforce continuity strategies and withdraw authorisation where schemes fail to meet standards. Member interests remain paramount in this instrument.

Part 5 of this instrument contains amendments to the Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2022 to ensure that certain aspects of the single or connected employer collective money purchase schemes regime are aligned with this new regime.

Part 6 and Schedule 7 make consequential amendments to other relevant legislation. Part 6 amends provisions in other legislation that give meaning to the term “scheme rules” to reflect provisions in this instrument that override rules of unconnected multiple employer collective money purchase schemes. It amends the Pensions Act 2004 to include the Pensions Regulator’s new power to issue a risk notice to a scheme proprietor of an unconnected multiple employer CDC scheme as one of its regulatory functions for the purposes of that Act. It amends the Pension Schemes Act 2017 relating to master trusts, so that the two multiple employer frameworks can operate in tandem and without duplicating authorisation requirements. This will avoid unnecessary burdens on business. Schedule 7 also amends other secondary legislation so that unconnected multiple employer collective money purchase schemes can operate as intended.

In conclusion, unconnected multiple employer CDC schemes are an important addition to the UK pensions landscape. When well designed and well run, which this instrument will ensure, they can help tackle the challenges we face. Our pensions world needs to change; we want pensions, not just savings pots. With the appetite for CDC growing among employers, the effect of this instrument will be to pave the way for potentially millions more savers to access its benefits. The Government are laying the legislative foundations, and it is now for industry to realise that potential. I commend this instrument to the Committee.

We have here the interaction of a number of different pieces of legislation. Of course, we are all looking forward to the Second Reading of the Pension Schemes Bill next week. We have before us the Occupational Pension Schemes (Collective Money Purchase Schemes) (Extension to Unconnected Multiple Employer Schemes and Miscellaneous Provisions) Regulations 2025. We also have the 2022 regulations that first set out the regulatory requirements for CDC schemes. In parallel, we have the Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations. As the Minister and the Front Bench well know, that sets out another of the Government’s initiatives: to provide CDC schemes that can offer retirement pensions, rather than people having to buy annuities. All these different pieces of legislation interact in ways, I think it is fair to say, that are sometimes difficult to grasp.

What worries me about these regulations is that it is a bit like when you have extensive building work in your house, and the architect asks you where you want the light switches. Of course, you do not know where you want the light switches until you have lived in that house for two or three years, but you have to decide in advance. This is my concern about these regulations: we do not know how these schemes will work in practice. We are all agreed that they are a good thing, we want to see them supported and developed and we have to start somewhere, but certain aspects of what is before us today cause me some concern—or, to tone it down, some level of interest.

First, is it clear that the provisions in the Pension Schemes Bill dealing with value for money, guided retirement and particularly scale will apply to these schemes? They are closer to these schemes than they are to defined benefit. It is quite clear in the legislation that the scale requirement applies to DC arrangements. To what extent will the scale requirement directly, or indirectly through the supervision requirements, end up requiring schemes of a particular scale? My fear is that, if there is a scale requirement, it will just be another barrier to establishing these schemes that, in practice, we all want.

My Lords, I am pleased to speak in this debate on the regulations extending collective defined contribution schemes to unconnected multiple employer arrangements. I say at the outset that I accept the apology given by the Minister for the changes needed in Schedule 2. I hope that when she responds she will confirm that these are minor changes, as I assume they are; that would be helpful.

By any measure, this is a highly technical statutory instrument that even seasoned pensions professionals would concede is difficult to absorb on first reading. Yet precisely because of that complexity, and the potentially far-reaching implications for the architecture of our pensions system, it is essential that this Committee scrutinises it with particular care. Collective defined contribution schemes—CDCs—are an important and promising innovation. They offer the potential for better outcomes than pure defined contribution schemes for risk-sharing across generations and smoothing investment volatility in retirement. They could and should play a larger role in the future of pension provision in the United Kingdom.

We also recognise that this SI is an enabling vehicle. It is a mechanism to broaden the CDC framework so that unconnected employers may participate. We raise no objection to that direction of travel. I am surprised that this debate will not have more contributions from other Peers. I am very pleased that we have the welcome and regular presence of the noble Lord, Lord Davies. I am quite surprised that we have no representation from the Liberal Democrats. I am not sure why that is.

However, as the noble Lord, Lord Davies, said—I agree with him—this instrument marks a potentially significant structural shift in how our pension system may evolve. For that shift to succeed, it must be underpinned by firmer analytical foundations than those that are currently available. I am grateful to the Minister and her officials for the time that they spent with me and my team last week exploring these issues in detail. Their openness is genuinely appreciated. Nevertheless, as she will expect, important gaps remain and there are many unanswered questions. The gaps give us real pause. Were we in government, we would have gone further to ensure that the essential groundwork had been completed to guarantee that this SI truly enables the smooth and secure creation of CDC schemes and to avoid expanding an industry of which the parameters, risks and long-term implications are still too insufficiently understood.

Let me now delve into our concerns. The first area of concern is consultation. We need clarity on who has been engaged and, notably, who has not. Many admitted bodies in the Local Government Pension Scheme, for example, might see CDC as a useful midpoint between the Local Government Pension Scheme and DC upon an affordable exit, yet it appears that they were not consulted. Can the Minister comment on that? As this policy expands from a single scheme to what could become a diverse market with unconnected multi-employer connections, transparency on consultation stages and milestones becomes more, not less, important.

A second area of concern is the wider vision for CDC expansion. What in practice do the Government envisage? Do Ministers anticipate a small number of large CDC master trusts or a competitive market of many providers? What scale is needed for a sustainable multi-employer CDC model? If the Government do not yet know, should more modelling not be undertaken before regular regulations are drafted? The scale and structure of the market will directly influence investment decisions and flows, regulatory design, government requirements and downstream financial stability risks.

This brings me on to another concern, which was raised by the noble Lord, Lord Davies, and takes account of discussions that I have had with the Minister, who I think raised it. It is to do with member communications. CDCs are not well understood. They are scarcely understood outside specialist circles. Transitions into and out of CDCs are fundamentally different from familiar DB to DC transitions. Yet the communication requirements in the regulations remain surprisingly light touch. Members need clearer, more strident, more stringent and more tailored information about benefit variability, collective risk and the absence of an individual pot. If we expand CDCs without ensuring that members fully understand what they are entering, we risk undermining confidence in the very innovation that we hope to promote.

We also need much greater clarity on what lessons the Government have drawn from the Royal Mail design. That scheme has been invaluable in demonstrating that CDC can operate at scale but may have equally exposed the practical challenges of modelling assumptions, governance structures and sustained member engagement. To date, we have seen no systematic public assessment of those lessons. How do the CDCs ascertain an aspired pension pot and how has this worked at the individual level at Royal Mail? It would be very helpful to have a response from the noble Baroness.

I am also keen to understand what the Government have learned about member take-up linked to that, the consultation experience and the challenges encountered during Royal Mail’s implementation. Have Ministers sought to add or remove elements of the framework in the light of what has worked—or, indeed, not worked—in practice? If so, where can Parliament see that thinking reflected? If not, is that not in itself an indication that further analysis should precede the expansion for which we are legislating today?