About this policy
Supervision
Collective defined contribution (CDC) schemes must be authorised in order to operate. To be authorised, they must have the right people, systems and processes, continuity plans and financial support to safeguard members. Once schemes are authorised, they are supervised by us.
Supervision aims to ensure that:
- CDC schemes continue to meet the authorisation criteria
- CDC schemes also meet their wider obligations, including other relevant legislation and codes of practice
- we meet our over-arching objective to improve the way workplace pension schemes are run
- we can identify and manage risks and issues quickly, and intervene where necessary
- we can fully understand the challenges a scheme will face in its market and development, and how prepared it is to face them
Supervision principles
We have five key operating principles for supervising CDC schemes. We will be:
- engaged and responsive: understanding the issues faced by CDC schemes
- proactive and forward-looking: taking action early to prevent member detriment, including taking enforcement action
- strategic and targeted: taking appropriate regulatory action to address systemic risks and issues in the pensions landscape
- proportionate and risk-based: monitoring and reacting to the market as it develops and focusing on the greatest developing risks
- consistent: acting in line with the approach we have communicated, and dealing consistently with similar scenarios
We will also supervise CDC schemes in a collaborative and proportionate way, using a broad range of engagement including expert-to-expert conversations to support our understanding of a scheme. Our goal through supervision is to be clear on the outcomes we seek for savers and to prevent compliance breaches or harms to savers before they occur. We will also use data, where possible, to prompt nuanced, two-way discussions. Through this, we will develop an informed and open relationship allowing early engagement on risks and issues.
Our expectations of CDC schemes
Those responsible for running CDC schemes are expected to interact with members of our team, including direct engagement with our range of experts. We expect those responsible for running CDC schemes to:
- be open, honest and transparent in their interactions with us, responding promptly to information requests
- proactively liaise with us and volunteer information about material developments, risks and issues in their scheme, which may affect its ability to meet the authorisation criteria and its other obligations
- satisfy us that they continue to meet their obligations and that there is a low risk of them failing to meet their obligations in the future, including by providing relevant evidence
- be proactive in identifying and monitoring risks
- present plans for rectification of any issues that affect the scheme’s ability to meet the authorisation criteria or its other obligations
While a CDC scheme is operating, we will need to be satisfied that:
- the individuals involved in running the scheme continue to meet the standards of honesty, integrity, financial soundness, competence and conduct appropriate to their role
- the systems and processes for running the scheme are efficient and robust, and contribute to the effective running and governance of the scheme
- there are adequate systems and processes and governance for communicating effectively with members, in particular about how the rate or level of benefits may change
- there is sufficient continuity planning to protect members where the risk of a scheme’s failure is increased, for example in the case of a triggering event
- there are sufficient financial resources to operate at set-up and after a triggering event without increasing the cost to members
- the scheme has a sound design, demonstrated by a viability report and appropriate supporting evidence
We will also monitor the CDC industry as a whole to identify:
- key risks relating to the market, and the best way to manage and mitigate them
- CDC schemes which are not meeting their legal and regulatory obligations, and
- CDC schemes operating without authorisation
Reviewing our approach
We will review and revise our policy, approach and guidance to incorporate lessons learned over time.
The supervision process
We will supervise CDC schemes in various ways after they are authorised. This will involve engaging with trustees, employers and other relevant persons such as the scheme administrator, service providers and advisers.
The frequency and intensity of our interactions with CDC schemes will depend on the risks and issues associated with them. We will prioritise resources accordingly when assessing whether schemes are meeting the authorisation criteria and their wider obligations.
Supervision will include:
- periodic scheme evaluations, including our assessment of whether the authorisation criteria continue to be met
- monitoring specific concerns about a scheme, key market risks we identify, or other areas we want to understand further, for example via thematic reviews
- reviewing regular and ad-hoc data submissions such as the supervisory return, scheme return, viability certificate and reports, certain member communications, the costs, assets and liquidity plan (CALP) and scheme report and accounts (outlined in ‘Requesting information’)
- interactions such as face-to-face meetings, visits and telephone calls
- reviewing significant event and triggering event notifications
We may consider using our powers, for example information requests, risk notices and improvement notices. Ultimately, if those operating a scheme do not actively co-operate and engage with us, it will be difficult for us to be satisfied that it continues to meet the criteria and its wider obligations. In such circumstances, we may use our powers or, ultimately, de-authorise the scheme.
Evaluating CDC schemes
For all CDC schemes, we will keep the intensity (frequency and detail) of supervision under review. This will be determined primarily by our assessment of the scheme’s level of risk.
We will contact the scheme trustees annually to summarise our evaluation of the scheme, our intended supervisory intensity, the key risks we have observed, the actions we expect the scheme to take, and our planned engagement timetable. Trustees should consider sharing this information with their auditors.
Any material changes to our evaluation, for example new risks and actions or changes to our engagement timetable, will be communicated to the scheme when they occur.
Meetings and scheme visits
Those responsible for running CDC schemes will usually be asked to meet us face to face to provide information and develop a mutual understanding of the risks and issues facing the scheme.
Meetings will be more common for those CDC schemes we perceive as being higher risk. We will normally give advance notice with an agenda and may ask specific people to attend. During the normal course of supervision, formal engagement meetings will take place annually, with trustees informally updating us after their quarterly board meetings.
Our meetings with trustees may become more frequent if material concerns are raised or we are conducting thematic work on specific risks. We will keep our own records of these meetings, and trustees and others in attendance are also free to do so. Any material issues or decisions arising from our discussions will be communicated to schemes after these meetings.
We may ask trustees for specific information and documents ahead of meetings, to help us understand a scheme’s risks and issues, and how it is meeting its obligations.
If information is not provided voluntarily, we may require specific information or documents under section 72(1) of the 2004 Act. We can also issue a notice under 72A(1) of that Act, requiring certain individuals, which may include the trustees, professional advisers, employers or any other person likely to hold relevant information, to attend a meeting and explain or verify information or documents.
Periodic phone calls
Those responsible for running schemes can expect to have periodic phone calls with us to give updates and address any specific concerns we may have. How often we have these calls will depend on the risks and issues associated with the scheme and the steps being taken to resolve them. Schemes that are subject to more intensive supervision are likely to have more scheduled calls. We may call particular trustees, representatives of the employer or others involved in running the scheme.
Allocating a named contact and the intensity of supervision
We will allocate each scheme to a named contact and tell the scheme if their supervisor changes.
Assigning a contact will support:
- open and honest interactions between us
- early identification and mitigation of risks
- managing issues of strategic significance
- the use of our powers
Requesting information
We expect those responsible for running CDC schemes to interact with us and provide a variety of information to enable us to supervise them.
Event notifications
This is information that those responsible for running schemes provide, informing us of particular events including triggering events and significant events (for example changes of trustee, revisions to the CALP), breaches of law and whistleblowing. Details of what constitutes a significant event and triggering event, as well as how those responsible for running schemes should notify us of them, are set out in the regulations and our code of practice. Please see our further guidance, which is available on request to authorised schemes. There is more information about reporting breaches of law and whistleblowing in section 3.3.
Required submissions
These are documents that those responsible for running CDC schemes must provide in line with deadlines fixed in legislation (for example the annual report and accounts, viability certificate and viability report).
Information requests
These are requests from us for information from those responsible for running CDC schemes, including the supervisory return which we may request once a year.
We will use the supervisory return to:
- validate and collect key data to ensure that we have received all the required evidence over the preceding 12 months to properly supervise the running of schemes
- understand future plans for each CDC scheme
- build a wider view of the CDC market as a whole
Those responsible for running schemes may also need to respond to requests for information required under section 72 of the 2004 Act. This helps us ensure that individual CDC schemes remain compliant with the authorisation criteria and allows us to understand the market as a whole and to verify or address specific risks in the market. We may request, as a minimum:
- trustee board minutes
- investment reports and advice on changes to the investment strategy (outside those covered by the supervisory return)
- administration reports
Information requests as part of supervision, predominantly to the trustees of CDC schemes, will help us to monitor schemes in more detail, particularly when they are being supervised more intensively, or where there are specific concerns.
Use of statutory powers and regulatory interventions
The enforcement powers that apply to CDC schemes are detailed in our regulatory and enforcement policies.
In addition, the following regulatory interventions apply specifically to authorised CDC schemes.
Pause orders
A pause order can be given to a scheme during a triggering event period under section 44 of the Act to limit the range of activity it can undertake during the period. We can issue a pause order if we are satisfied that:
- it will help trustees carry out their implementation strategy, or
- there is an immediate risk to members’ interests or scheme assets, and issuing the order is necessary to protect the interests of the generality of members
If we issue a pause order, it will specify the effective period, which will not be more than three months. However, we may decide to extend this period for a further three months on one or more occasions. For example, we may consider that more time is needed to resolve data issues, or that further contributions during that period would compound the existing issues that led to a triggering event.
A pause order may include the following directions to a CDC scheme:
- preventing new members (or specified classes of members) joining
- stopping the receipt of contributions or payments to the scheme by or on behalf of members, or stopping the payment of any (or specified) benefits
- refunding contributions or deductions from earnings, and stopping any transfers, transfer payments or other steps to discharge any liability of the scheme
We will monitor compliance with a pause order using a number of channels, including periodic reports submitted by the scheme and HMRC Real Time Information data.
Risk notices
We can issue a risk notice to challenge a scheme when we have a concern that a scheme is likely to breach the authorisation criteria. We will use it where we want to see trustees planning corrective action, which we will then expect to be delivered.
The risk notice allows us to intervene where we suspect a scheme is not being effectively run, governed or funded. It can be used instead of – or in advance of – the more serious power of de-authorisation.
We do not have to evidence a breach of the law or the authorisation criteria to issue a risk notice, but we will explain our concern and the evidence on which our decision to issue the notice is based.
When considering whether to issue a risk notice, we will refer to the standards and expectations in our code of practice. If a scheme does not meet these expectations, that suggests it may be in breach of the authorisation criteria.
When a risk notice is issued, the trustees must send us a resolution plan within 14 days to satisfy us that effective action will be taken.
The detail of the plan and the deadline we set for implementing it will depend on the nature, severity and complexity of the potential breach. This will be discussed between a scheme’s trustees and their contact in advance of and at the point at which the risk notice is issued. The formal risk notice will then set a deadline for resolving the issue.
Civil penalties under section 10 of the Pensions Act 1995 can be imposed on a trustee who fails to comply with the notice.
Fines can be levied against individuals and schemes if:
- a resolution plan, revised plan or progress report is not submitted by the deadline
- a plan is not fully and properly implemented by the deadline
Failure to comply with a risk notice would also be likely to lead us to consider the further or additional use of our powers, depending on the nature of the breach and the effectiveness of a scheme’s attempt to rectify the situation.
Determinations Panel decisions
The Determinations Panel is responsible for decisions to withdraw authorisation and issue pause orders
The Determinations Panel’s procedure describes how decisions and determinations on cases are made, when and how those responsible for running CDC schemes can make representations to the Determinations Panel, and when and how decisions can be referred to the appropriate tribunal.
Publishing reports
We may publish reports of our regulatory activities to educate and raise awareness of issues, and to deter unlawful or improper practices. A decision to publish a report (under section 89 of the Pensions Act 2004) will be taken on a case-by-case basis in line with our publication policy.
Publication also enables third parties to understand how their actions may affect schemes. We put great emphasis on preventing problems from occurring and providing guidance to build good practice.
Withdrawal of authorisation
We need to remain satisfied that a CDC scheme meets the authorisation criteria as part of supervision. If we are no longer satisfied of this, we will consider using our regulatory powers, including withdrawal of authorisation.
Decision to withdraw authorisation
In considering whether a CDC scheme should remain authorised, we will consider:
- the frequency, severity and actual or potential impact of a scheme’s failures to meet its obligations
- the risk of a scheme not being able to continue to meet its obligations
- the intention and behaviour of those involved in running the scheme, including the transparency of the scheme, and any remedial action already taken
The decision to withdraw authorisation from a CDC scheme is taken by the Determinations Panel.
There are two ways in which authorisation can be withdrawn:
- under the standard procedure, which includes a warning notice
- under the special procedure without a warning notice, where there is (or is likely to be) an immediate risk to members’ interests or scheme assets
Under the special procedure, those directly affected by the decision are not informed of the procedure until after the Determinations Panel makes a determination and issues a determination notice and order. This is followed by a compulsory review of the determination, involving the directly affected persons. The Determinations Panel then makes a final determination in a final notice.
The special procedure can only be used if the statutory criteria are met. We anticipate that, in most cases, the standard procedure will be used where we seek to withdraw authorisation. Scheme trustees can challenge a decision to de-authorise by referring it to the Upper Tribunal. Go to challenging enforcement action.