U.K. defined benefit fund sponsors interested in collective defined contribution plans received a draft code of conduct Tuesday from The Pensions Regulator.
A CDC plan is a hybrid of a defined benefit and defined contribution plan. Lifelong income is secured by pooling participant assets and investments in both accumulation and decumulation phases, while participants rather than plan sponsors bear the investment and longevity risks.
CDC plans were enacted as part of the Pension Schemes Act in 2021, and plans can start applying for approval in August 2022. Prospective CDC plans must prove they are well run.
The TPR consultation offers a code of practice for how trustees can apply and how The Pensions Regulator will assess those application as well as ongoing supervision.
Proposed criteria include fitness and propriety, systems and processes, member communications, continuity strategy, financial sustainability and sound scheme design.
David Fairs, TPR's executive director of regulatory policy, said in a news release that the regulator will revisit the code to set expectations for winding down plans, and will produce additional guidance. Mr. Fairs called CDC plans a "viable alternative to traditional defined benefit and defined contribution schemes."
The Royal Mail Group will be the U.K.'s first such plan, with implementation expected in the coming months following regulatory approval. Its CDC arrangement will replace a £10 billion ($13.6 billion) defined benefit fund.
Steven Taylor, a partner at investment consultant Lane Clark & Peacock, said in a separate statement that while further progress on the CDC front is welcome, "the new consultation does place a lot of focus on the style of scheme favored by Royal Mail. This means the draft code may not currently support all of the features envisaged by other employers wishing to go down the CDC route, and will need to be updated over time to accommodate them. We expect this to be a key focus in many of the industry responses," he said.
Employers would like to see additional options, including different benefit structures that account for younger participants to reduce intergenerational cross-subsidies, and auto-enrollment features that allow benefits to build up at more than one rate, LCP spokeswoman Lauren Keith said in an email.
