The U.K. Department of Work and Pensions is seeking views from trustees and plan sponsors on its draft collective defined contribution plan regulation published Monday.
The proposal follows the U.K. Pension Schemes Act 2021, which permitted employers for the first time to launch collective DC plans, also referred to as collective money purchase plans.
In a CDC plan, income is secured by pooling plan participants' assets and investments, and participants bear the longevity and investment risk. That is in contrast to defined benefit funds where the sponsoring employer bears all the risk.
The arrangement can give employers more predictable running costs of plans, the DWP said Monday, also noting that CDC plans have more potential to invest in illiquids and could be more resilient to sudden market downturns.
Under the government's proposal, a CDC plan could operate in the U.K. after satisfying the regulator's authorization criteria regarding financial sustainability, sound plan design and effective communication processes, verified by trustees and actuaries.
Plan sponsors are required to have sufficient financial resources and well-considered strategies to meet the costs of setting up and running a CDC plan, DWP said. The regulator will require evidence of the cost estimates, details of the plan's sources of income, and the trustees' strategy for meeting any of the plan's asset shortfall vs. its target funding level due to lower returns.
Plan sponsors are also required to show they are ensuring communication is not misleading to plan participants and that they are gathering feedback from plan participants through necessary IT systems.
The U.K. government said Monday that regulation is aimed at single-employer and industrywide multiemployer pension funds. The proposed regulation currently excludes non-industrywide multiemployer plans such as master trusts from launching CDC plans or introducing CDC plans as a decumulation option.
"Right now our priority is to ensure the full framework for single employers and connected multiemployer CDC schemes is in place as soon as we can, and this consultation is rightly focused on delivering that. But we are not deaf to calls from those who wish us to go further," Guy Opperman, U.K. minister for pensions and financial inclusion, said in a statement accompanying the consultation.
"Once this first step is done, we will turn our attention to the growing demand for these other types of provision," he added.
The proposed regulation also accommodates Royal Mail's ongoing plan to replace its £10 billion ($13.9 billion) defined benefit fund with a CDC arrangement.
Commenting on the proposal, Simon Eagle, senior director at consultant Willis Towers Watson, who advised Royal Mail, said that "the government's launch today of its consultation on CDC regulations represents another major step towards the introduction of CDC pensions to the U.K."
However, he added that only larger employers with material resources are likely to set up their own CDC plans in accordance with these, he said.
Chris Bunford, principal at consultant Lane Clark & Peacock, said in an emailed comment: "It's good news that progress is being made in this space and we can now see a draft framework but a note of caution needs to be struck."
"Whilst these regulations might facilitate the Royal Mail scheme, they are potentially restrictive in terms of the acceptable designs. Companies wanting to implement CDC schemes with different features to Royal Mail may find they have to wait for future regulations to give them a manageable pathway," he added.