The Minister of State at the Department for Work and Pensions (Baroness Sherlock) (Lab)

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. CDCs can support the wider economy, too. Longer investment horizons mean greater investment in vital UK infrastructure and the technologies of the future, such as renewable energy. Pooling can also shield savers from much of the uncertainty and risk faced by members of DC schemes, which is especially important as they approach retirement. CDC schemes offer members a seamless transition from saving into receiving a trustee-managed retirement income. We know that many people do not want—and, indeed, feel ill-equipped—to make complex financial decisions at retirement. Some 72% of DC members want a pension income yet 50% of pots are taken fully as cash, exposing them to individualised longevity risk. CDC schemes provide a target income for life and will target at least inflationary increases in member benefits at a scheme’s outset, helping members’ money keep pace with the cost of living through their retirement. The Government want to ensure that as many savers as possible can take advantage of these benefits. That is why we have introduced this legislation. This instrument opens the door for broader adoption of CDCs: it will allow different, unconnected employers to participate in the same scheme, including smaller employers who lack the scale or expertise to go it alone. It also opens the door to CDC being a solution for specific sectors and for commercial schemes. For employers, the benefits are clear. Their liability is no greater than in a DC scheme, with contributions being made in the same way. Yet, with the aforementioned benefits, CDC schemes can be a valued employee benefit, allowing employers both to attract and retain talent in a competitive labour market. I will now dive into the detail of this instrument, and there is, of necessity, plenty of detail. Despite the successful launch of the Royal Mail collective plan last year, CDC remains a relatively novel concept. It is critical that employers and their employees can have confidence in CDC pensions. The Government therefore make no apology for this instrument setting a high bar for entry. The robust authorisation and supervisory framework introduced by this legislation means employers can be confident they are joining well-run, well-governed schemes. Part 2 of this instrument removes the exclusion in the Pension Schemes Act 2021 which limits the schemes that can be collective money purchase schemes to schemes used, or intended to be used, by single or connected employers. This allows for the creation of unconnected multiple employer schemes. Part 2 also amends the definition of a qualifying scheme, so that a broader range of organisations can set up a collective money purchase scheme. This will enable commercial organisations to establish unconnected multiple employer schemes. A scheme applying for authorisation must satisfy the regulator that it meets the authorisation criteria. These criteria are listed in Section 9(3) of the Pension Schemes Act 2021. Part 2 amends the existing authorisation criteria in the 2021 Act and thereby creates additional criteria, specifically for unconnected multiple employer collective money purchase schemes. We have identified persons that we consider will have important roles in unconnected multiple employer CDC schemes and have brought these people within the scope of the “fit and proper persons” test, so that they are subject to appropriate scrutiny. Regulation 10 amends the 2021 Act to require that the scheme has a single scheme proprietor meeting specific criteria and the specific requirements set out in new Section 14C of that Act. As we are seeking to extend CDC provision to unconnected multiple employer CDC schemes, we know there will be new entities involved in the operation and funding of these new types of CDC scheme. We want to ensure that any financing required to meet relevant costs is credible and realisable, so that it is available at the point of need. Therefore, the scheme proprietor’s ability to deliver such financing will need to be assessed by the regulator, both at authorisation and on an ongoing basis. Regulation 10 of the instrument also inserts a business plan requirement under new Section 14A of the 2021 Act. The scheme proprietor would be required to prepare, maintain and submit a business plan to the regulator, which will include the key financial information for its financial sustainability assessment. The detailed content of the business plan is set out in newly inserted Schedule 1B to the 2021 Act. These regulations will permit schemes that intend to operate on a commercial basis. This will involve acquiring new business through the promotion or marketing of their scheme. To mitigate the risk of schemes overpromising to gain a commercial advantage, or mis-selling, we are introducing a new promotion or marketing authorisation criterion for these schemes. The requirement is that no person has carried out promotion or marketing of the scheme that is unclear or misleading without rectification, and that the scheme has adequate systems and processes for ensuring that its promotion or marketing is clear and not misleading. We also want trustees of these schemes to focus entirely on the interests of the scheme members and to have complete autonomy to do so. If the trustee were also to act as a person who promotes or markets the scheme, or as the scheme’s CFO, it would detract from that responsibility and create a clear conflict of interest. Regulation 5 makes a separation of these roles a criterion for authorisation. The Government’s intention is that running an unconnected multiple employer CDC scheme as a closed scheme should always be an option open to trustees, where it is viable to do so, and to the extent permitted under wider legislation. Regulation 5 therefore inserts a new authorisation criterion into the 2021 Act to ensure that trustees can choose this option if appropriate. Finally, on Part 2, Regulation 6 imposes a mandatory deadline of 24 months from authorisation by which an authorised unconnected multiple employer CDC scheme must start being operated. This is to deter speculators. We want only people or organisations that are fully committed to providing well-run and soundly designed unconnected multiple employer CDC schemes to apply for authorisation. Part 3 of this instrument supplements the meaning of “connected” in Section 49(2)(a) of the Pension Schemes Act 2021. This is relevant for determining whether a collective money purchase scheme is a single and connected employer scheme or an unconnected multiple employer scheme and therefore which of the two legislative frameworks applies to it.