This guide is for financial advisers only. It mustn’t be distributed to, or relied on by, customers. It is based on our understanding of legislation as at May 2023.
CMP is a new type of UK pension benefit which was introduced in the Pension Schemes Act 2021.
CMP benefits are an alternative to defined benefit (DB) and defined contribution (DC) schemes but will still be classed as a money purchase benefit. A scheme providing CMP benefits will have trustees in the same way that DB and occupational DC schemes have. Employer and employee contributions will be set in advance as with DC benefits, BUT employers participating in a scheme providing CMP benefits will not be required to cover any deficit in CMP benefits as can happen with defined benefits. There is therefore a known contribution cost for an employer offering CMP benefits. All contributions in respect of CMP benefits will be pooled, with the collective fund being invested. The trustees will make all investment decisions in respect of the collective fund.
CMP benefits don’t provide a promised level of pension or lump sum. Members will be provided with a target level of benefit that can be increased or reduced, even in payment, as a result of annual actuarial valuations. In saying that, pension levels are expected to be smoothed in practice to avoid any volatility. Modelling, valuations, and forecasting will be carried out by scheme actuaries. To access pension flexibility options, a transfer to a DC scheme will be required.
The first employer that will provide a scheme offering CMP benefits is Royal Mail. Their scheme, which is currently expected to commence in late 2022 pr early 2023, will be known as The Royal Mail Collective Pension Plan. The Royal Mail scheme aims to provide a CMP pension benefit in retirement that provides a better outcome than a DC annuity purchase, which will also be a specific aim for any other scheme providing CMP benefits. The retirement benefit in the Royal Mail scheme will be a pension commencement lump sum and a CMP pension based on 1/80th of pensionable pay for each year of service. Normal retirement age will be 67 but benefits can be paid earlier on early retirement, ill-health or death.
AS CMP benefits are not classed as DB, there will be no protection offered from the Pension Protection Fund (PPF) should an employer get into financial trouble. It is worth noting that the Royal Mail scheme will provide a CMP pension benefit but the pension commencement lump sum will be provided under a separate section of the scheme on a DB basis. Therefore, the lump sum would benefit from protection under the PPF.
Beyond the Royal Mail scheme, a wider model may develop so other employers have the option to operate a CMP scheme for their employees. CMP schemes are widely used in other countries – notably in Canada, Denmark and the Netherlands – and are also known in the UK as Collective Defined Contribution (CDC) schemes.
In order to provide CMP benefits, a scheme must be authorised, and will be subject to ongoing supervision, by the Pensions Regulator to ensure that the scheme meets the necessary standards. Where a scheme offers different types of benefits, for example, DB and CMP benefits, it is only the CMP section of the scheme that must meet the authorisation standards. The Pensions Regulator has published a Code of Practice setting how an application for authorisation must be made and how they will assess the matters that regulations require them to take account of in deciding whether to authorise a scheme providing CMP benefits.
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