In the third of our series of three articles on CDC, we focus in detail on the draft regulations set out in the Consultation and, in particular, how these differ from the position for single / connected employer CDC schemes.
Sectionalisation for different strategies
Regulation 25 of the Draft Occupational Pension Schemes (Collective Money Purchase Schemes) (Extension to Unconnected Multiple Employer Schemes and Miscellaneous Provisions) Regulations 2025 (the Draft Regulations) introduce a new trigger for sectionalisation for multi-employer CDC schemes.
Where, because of investment strategy changes, the combination of benefits provides materially different rates or amounts by reference to which qualifying benefits are provided each year, or materially different expected adjustments to those rates or amounts, a new section should be opened.
There is a balancing act here, because sections are needed so that members do not cross subsidise each other and to ensure fairness between groups. However, economies of scale and the benefits of investment performance (achieved by pooling risk) could be undermined by multiple employers in multiple sections. Consequently, the question will be what “material” means and how this should be interpreted to achieve this balance. Guidance may be key here.
Promotion and marketing
Recognising the increasing intention for unconnected multiple employer CDC schemes to operate on a commercial basis (for example by competing to win appointments from employers) and to manage the risk of overpromising benefits and mis-selling, the Draft Regulations introduce a new promotion or marketing authorisation criterion. TPR must be satisfied:
- that no unclear or misleading promotion or marketing of the scheme has been carried out without rectification; and
- that schemes in relation to which there is promotion or marketing have adequate systems and processes for ensuring that the scheme’s promotion of marketing is clear and not misleading.
Part 2 of new Schedule 1C to the Pension Schemes Act 2021 details points that The Pensions Regulator (TPR) is required to consider when determining if the unconnected multiple employer CDC scheme has adequate systems or processes in place. An example is having systems in place for handling complaints and feedback. This will be an extra pressure on TPR to ascertain and judge whether promotion is sufficiently clear.
The different roles in unconnected multiple employer CDC Scheme
The regulations also set out a clear separation between:
- the role of a proprietor;
- the role of a trustee; and
- the role of the chief financial officer.
DWP envisage the promotion or marketing of the unconnected multiple employer CDC schemes being carried out by the proprietor or a person assigned to undertake the activity by the proprietor from either the organisation or a third-party organisation. As the trustee may not promote the scheme, a grey area is introduced with respect to a trustee sending “reassuring” messages to members.
In addition, there are restrictions placed on trustees for engaging in promotion and marketing. This may be challenging for trustees – where is the dividing line between reassuring members, and promotion of the scheme?
Threshold for benefit increases
For unconnected multiple employer CDC schemes, the regulations introduce a maximum threshold for increases, beyond which annual increases cannot be applied: CPI + 2% p.a. These schemes are, however, able to set a higher threshold in scheme rules, which reduces the likelihood of additional funding above the threshold from being allocated to members’ benefits as a one-off increase.
