Pensions Bulletin 2024/38

Royal Mail CDC scheme launches 

The Royal Mail Collective Pension Plan opened its doors on 7 October 2024, with most Royal Mail employees joining automatically on this day, or as soon as they reach one year’s continuous service with Royal Mail if later.

The UK’s first collective money purchase scheme provides an income for life and a one-off lump sum at retirement.  Members pay 6% of their pensionable pay, while Royal Mail contributes 13.3%, plus any excess from an additional 0.3% primarily intended to fund ill-health benefit premiums.

Multi-employer CDC consultation published

On 8 October 2024 the Department for Work and Pensions published its consultation on unconnected multi-employer CDC schemes, including master trusts. Coming hot on the heels of the Royal Mail scheme launch, and hailed as “a truly landmark moment for the UK pension landscape” by Pensions Minister Emma Reynolds, this latest consultation follows on from the DWP’s earlier consultation to extend the existing CDC legislative framework, the response to which was published in July 2023 as part of the then Government’s Mansion House package (see Pensions Bulletin 2023/28).

Much of the DWP’s latest proposals, which are set out in two sets of new regulations, are a continuation of the single and connected-employers CDC scheme framework, with necessary changes to ensure that it meets the needs of unconnected employers and commercial providers. These changes include:

• A single section within the scheme will generally be able to accommodate different contribution or accrual rates; new sections will only be needed where changes to rates or amounts are linked to a change to the investment strategy. Members’ benefits could also target different annual increases, based on the performance of the scheme since their employer joined.
• To deter commercial speculators, the scheme must commence operation within 18 months from the date on which the Pensions Regulator receives its application for authorisation (provided authorisation is granted).
• The scheme must have a single “scheme proprietor”, who will be responsible for preparing, maintaining and submitting a business plan; financing the scheme where its administration charges are not enough to cover its costs; making business decisions relating to commercial activities and be liable to meet the costs of any continuity options; providing funds to set up and obtain authorisation; and preparing, reviewing and revising the continuity strategy. The scheme proprietor must also approve the scheme’s viability report and any revisions to it.
• To enable schemes to operate on a commercial basis, the scheme may have “a person who promotes or markets an unconnected multiple employer scheme”. The scheme may also require a “chief financial officer” and a “chief investment officer”. Where these roles exist within the scheme, the Regulator will assess them against the fit and proper persons’ test.
• An “actuarial equivalence test” is introduced at the authorisation stage and on an ongoing basis. In simplified terms, the test compares the value of the benefits expected to accrue during the relevant period with the value of the contributions expected to be made in that period and would only be passed if these two amounts are equal for each active member. A similar test could instead be applied at an employer level, but with further requirements. Schemes would not be able to switch between approaches.
• The Regulator’s authorisation criteria will also be extended so that appropriate scrutiny is applied at initial authorisation and on an ongoing basis, including scheme accounts, business plan, promotion or marketing, and IT systems.

Implementation of the above does not require primary legislation as sufficient power to introduce unconnected multi-employer CDC schemes was taken in the Pension Schemes Act 2021. Therefore, the proposed Occupational Pension Schemes (Collective Money Purchase Schemes) (Extension to Unconnected Multiple Employer Schemes and Miscellaneous Provisions) Regulations 2025 operate by amending the CDC provisions in the Pension Schemes Act 2021, and then replicating and amending the provisions originally designed for single-employer schemes as set out in the Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2022. They also amend these 2022 regulations and make consequential amendments to other Acts and secondary legislation. Separately, the proposed Occupational Pension Schemes (Collective Money Purchase Schemes) (Miscellaneous Amendments) Regulations 2025 make some changes to other regulations.

Consultation closes on 19 November 2024. The DWP expects to lay the secondary legislation in 2025 and bring the updated legislation and updated Regulator’s Code into force as soon as practicable subject to parliamentary approval. In the meantime, the DWP will continue to work with the industry to explore trust-based decumulation-only CDC options. 

Parliamentary Ombudsman investigates married women’s state pension underpayments

LCP has been told that the Parliamentary and Health Service Ombudsman has decided to carry out an investigation into underpayments relating to seven lead cases, likely to be representative of a large group of older married women receiving low state pensions based on their National Insurance record only. If the investigation, which relates to pre 2008 situations, finds in favour of these cases, the Department for Work and Pensions may have to pay hundreds of millions of pounds in state pension arrears.

Details of the issue are contained in this LCP press release, which explains that this is the latest step in a complaints process that has in some cases taken three years to reach this stage.

The Ombudsman will now undertake an in-depth investigation, including obtaining details from the DWP of all the information available to these married women at the time and what letters people were sent. It will then share preliminary findings with the DWP and the complainants before reaching a final recommendation.

Lifetime Savings Model proposed

On 8 October 2024 the Pensions Management Institute and Schroders published their promised White Paper setting out their suggested recommendations to policymakers to address the challenges that everyday people face when managing their money. The existence of this project was signalled in March 2024, under the heading of the Lifetime Savings Initiative (see Pensions Bulletin 2024/10), with the nature of the contents of this White Paper being trailed in August 2024.

Noting that the UK framework for savings is highly inflexible compared to other countries surveyed (such as Singapore, the USA and Australia), the White Paper proposes the creation of a Lifetime Savings Model which is divided into two components. The first is a National Short-Term Savings Plan (NSSP) – to facilitate simpler short-term saving throughout life to build a ‘rainy day’ fund. The second is a National Lifetime Savings Plan (NLSP) – extending the existing automatic enrolment framework.

Aspects of the model include:

• A target rainy day fund of, for example, £1,000 to be achieved through voluntary contributions, initially on an opt-in basis, with deductions taking place through payroll (such as at 2% of pay) and likely accumulated in simple cash savings products;
• A nudge to redirect NSSP payments to pension savings through the NLSP once the rainy day fund had been achieved;
• The funds arising from any pension contributions additional to the auto-enrolment minima being accessible before retirement in limited circumstances such as for first time buyers to get on the housing ladder and for individuals to repay debts where they find themselves in serious financial problems.

The paper argues that this model addresses the inflexibility of the UK’s current long-term savings system and should benefit those with the ability to save something, which it says comprises approximately 80% of the UK working population.

Pensions tax law tidy up reaches next stage

Draft regulations have been laid before Parliament that contain a number of error-fixing and omission resolving adjustments to pensions tax law so that the LTA abolition policy that was rushed through Parliament in the form of the Finance Act 2024 works as intended. This follows news of an informal consultation that took place over the summer (see Pensions Bulletin 2024/31).

The Pensions (Abolition of Lifetime Allowance Charge etc) (No. 3) Regulations 2024 are intended to come into force on 18 November 2024 but backdated so that they have effect from the 2024/25 tax year onwards.

The Explanatory Memorandum lists the nature of the amendments being made. Of particular significance is the correction of faulty new law impacting those with protected lump sum rights in excess of the 25% normal limit. There is also a new calculation for trivial commutation lump sums as that introduced by the Finance Act 2024 was found to produce anomalous results. A transitional arrangement has also been included following the consultation so that those receiving such trivial commutation lump sums between 6 April 2024 and 17 November 2024 will not be disadvantaged.

Further and much more extensive regulations are expected to be laid before Parliament shortly that should complete the tidy up.

SPP sets down some thoughts on pension tax relief 

On 8 October 2024 the Society of Pension Professionals published “Pensions tax relief: separating fact from fiction” which examines some of the options that the Government may be considering in the run up to the Budget to reduce pension tax relief to make savings for the Treasury.

After some scene setting, including a critique of how pensions tax relief is measured by HMRC, the paper focuses on the possibility of the Government introducing a single rate of tax relief on contributions, pointing out the numerous risks and challenges associated with such a change. It then goes on to consider alternative revenue raising measures that might feature in the Budget, such as making employer pension contributions subject to NICs, amending tax policy in relation to death benefits and restricting the tax-free lump sum taken on retirement.

The paper concludes that there are no easy solutions to the challenge of reducing pensions tax relief on contributions and that if any of the other options are to be taken forward, they should be properly consulted on and implemented in a realistic timeframe.

FRC updates model guidance for actuaries

On 7 October 2024 the Financial Reporting Council published revised guidance on that part of TAS 100 relating to models used in technical actuarial work. The original guidance had been issued in July 2023 (see Pensions Bulletin 2023/27) and like that guidance it has been issued without any formal consultation. Its status is “persuasive, not prescriptive”, albeit the FRC encourages compliance.

The revised guidance is intended to support the growing use of Artificial Intelligence and Machine Learning (AI/ML) techniques in actuarial work. The structure is unaltered to the July 2023 edition but has been extended in parts. Although the previous edition referenced AI/ML in places, this latest edition says more, particularly under the headings of model limitations and bias and through the addition of examples 7-9 in Appendix 2. There is also a new example 6 under the heading of model bias.