HL UK Pensions Law Digest 5 November 2025

Welcome to our latest update, in which we cover: 

Collective defined contribution (CDC)

• Expansion of CDC to unconnected multi-employer schemes and retirement-only arrangements;

HMRC Pensions Newsletter 174

• HMRC comments on the requirement for pension scheme administrators to be UK-residents and on the tax consequences of returning lump sums.

Collective defined contribution (CDC): expansion to unconnected employers and retirement-only pensions

The DWP is widening of the scope of collective defined contribution (CDC) provision with:

• A response to consultation and final regulations to enable occupational schemes for unconnected multiple employers to be CDC schemes from 31 July 2026; and
• Consultation on enabling the provision of retirement-only CDC schemes.

A new set of amending regulations has also been made, to correct various errors and to remove unnecessary provisions in existing regulations (SI 2022/337 and SI 2013/2734)

CDC unconnected multiple employer schemes (UMESs)

Points of interest from the consultation response include:

• Authorisation:
  • Legislation to permit CDC provision by unconnected multi-employer schemes (UMESs) and an updated Code of Practice from the Pensions Regulator (TPR) are intended to come into force on 31 July 2026.The regulations will allow a “whole-life” CDC provision, covering both accumulation and decumulation.
  • The policy intent is for there to be two separate CDC authorisation frameworks: the existing framework for schemes with a single employer or connected employers (SECS), and the new CDC UMES framework for schemes with unconnected employers. The CDC UMES framework will be based on the SECS authorisation criteria, with additional or amended requirements as necessary.
  • An authorised Master Trust which wishes to open a CDC section will have to apply for authorisation under the CDC UMES legislation (as well as continuing to satisfy the Master Trust authorisation criteria).
  • A CDC UMES granted authorisation must commence operating within 24 months of applying for authorisation, otherwise its authorisation will be automatically withdrawn (unless TPR agrees to an extension of up to six weeks).
• Benefits from a CDC UMES:
  • Commutation payments (including full commutation) will be allowed, where permitted by scheme rules.
  • Benefits will be subject to annual valuation and adjustment to maintain the balance between the value of the assets and the projected cost of benefits. Whilst schemes will be targeting an annual increase at least in line with CPI at launch, it is inevitable that the funding level (and therefore, the annual adjustments) will vary over time. The DWP intends to allow schemes to tranche accrual and benefits between different employers, so that employers joining the scheme need only meet the scheme's original benefit index target (for example CPI). However, the draft legislation proposed in consultation, was found not to work as intended, so the DWP will work with stakeholders to develop an alternative policy approach that is "workable, fair and not unduly burdensome". This may require amendment to the final regulations after they come into force on 31 July 2026.
  • It will be for schemes to decide whether to include transfer values in members’ annual benefit statements.
• Actuarial equivalence:
  •  Actuarial equivalence may be determined at the level of either a member or the employer. Actuarial equivalence will be achieved when the expected accrual and expected contributions are equal over the “relevant period” agreed between the trustees and the scheme actuary.
  • The assumptions and methods used for calculating actuarial equivalence must be decided by the trustees (having taken actuarial advice) but need not be the same as those used for the scheme’s actuarial valuation. For example, it will be acceptable for a CDC UMES to use gender-based assumptions for its valuation but to offer gender-neutral accrual rates.
• Scheme proprietor:
  • To avoid conflicts of interest, the scheme proprietor of a CDC UMES may not also be a trustee of the scheme. A scheme proprietor will be responsible for the scheme's business and commercial decisions, whereas trustees will focus purely on member interests. Therefore, a Master Trust which offers CDC UMES will need to appoint a scheme proprietor to operate the CDC UMES section, separate from the scheme trustee. The Master Trust will not necessarily have to set up a new entity to undertake this role. It would appear that, for example, the "scheme funder" or "scheme strategist" could be appointed, provided that they satisfy the eligibility requirements, including those relating to financial sustainability.
  • Following consultation, the DWP has removed the requirement that the scheme proprietor may only carry out activities which relate directly to CDC UMES schemes. It recognises that this restriction could have caused operational difficulties and inefficiencies, for example if an existing Master Trust wants to set up a CDC UMES section.
  • Scheme proprietors will be expected to submit individual accounts sufficient to enable TPR to carry out the assessments it needs and may not take advantage of exemptions for small or medium-sized businesses.
• Communication and marketing
  • It will be a requirement of authorisation that no person has carried out unclear or misleading promotion or marketing (unless this has been rectified) and that the scheme has systems and processes for ensuring that promotion or marketing of the scheme is clear and not misleading.
  • Trustees of a CDC UMES will be prohibited from promoting or marketing the scheme, regardless of whether the scheme is commercial or non-profit. This will include a prohibition on communications intended to induce prospective employers to use the scheme.

Retirement CDC

Points of interest from the consultation document include the following.

• Structure and authorisation:
  
  The DWP intends that a Retirement CDC scheme will:
  •  Be an occupational scheme established under trust as a section of an authorised Master Trust or an unconnected multiple employer scheme (UMES);
  • Be authorised by the Pensions Regulator (TPR), subject to meeting authorisation criteria similar to those applicable to a UMES, with certain modifications as appropriate;
  • Have only pensioner members, with no contributions or ongoing accrual;
  • Through pooling longevity risk and investment, be able to invest in a higher proportion of growth assets and gain higher returns for members; and
  • Receive the same tax treatment as other registered pension schemes.
• Benefit design:
  • The DWP wishes to allow schemes some flexibility in benefit design. It is aware that designs being considered in the market include:
    • Using underwriting to reflect health or demographic factors;
    • Options for lump sum payments;
    • Provision of death benefits; and
    • Creating cohorts of members, with the terms of entry reflecting market conditions at time of joining, to avoid excessive cross-generational subsidisation.
    • Offering flat rate pensions (equivalent to a flat rate annuity) is not considered appropriate for CDC. Flat rate pensions would have a higher risk of being cut as part of the annual adjustment, which could undermine confidence in CDC.
  • Transfers into a scheme should be on an actuarially equivalent basis, with the expected value of benefits provided equal to the transfer value received.
  • Trustees of Master Trusts with both Retirement CDC and DC sections may design a guided retirement solution which combines both drawdown and Retirement CDC. Drawdown would be facilitated through the DC Master Trust section; and CDC benefits would be accessed through the Retirement CDC section of the scheme. This is because there must be appropriate separation of CDC benefits and other benefits in accordance with the Pension Schemes Act 2021.
• Route to joining a Retirement CDC scheme:
  • Retirement CDC schemes are expected to operate in a wholesale market, with access to a particular Retirement CDC scheme only if it has been selected by the trustees of the DC scheme in which a member has accumulated a DC pot.
  • There will be two access routes to membership of a Retirement CDC scheme. Firstly, trustees may select a Retirement CDC scheme as a default solution under the new guided retirement duty. Alternatively, trustees may enter a formal partnership with a Retirement CDC scheme, to make it available to members who are actively engaged and who choose CDC as their retirement income provision.
  • The preservation regulations (SI 1991/167) will be amended to permit the transfer of a member’s DC benefits to a CDC scheme without consent.
  • Retirement CDC schemes will not be aimed at retail investors. Marketing and promotion to prospective and existing members of Retirement CDC schemes will be prohibited. This will not prevent a Retirement CDC scheme providing a new member with factual information about options to consolidate other DC pots when joining the scheme.
• Group personal pensions:
  • The Financial Conduct Authority (FCA) is expected to make corresponding rules applicable to group personal pensions, to enable access to Retirement CDC under the guided retirement duty.
• Alternative models and expansion of Retirement CDC:
  • The DWP is seeking views on whether providers of non-workplace pension schemes might form partnerships with Retirement CDC schemes to allow members access to Retirement CDC, and how such members could be protected.
  • While ruling out retail provision of Retirement CDC at present, the DWP intends to keep the market under review to consider whether allowing a retail offering may be appropriate in future.
  • Retirement CDC through a universal provider (such as NEST or the Pension Protection Fund (PPF)) is an alternative model by which Retirement CDC could be made available to all, including the self-employed. However, this would require significant policy development and time to implement. At this stage, the DWP considers the model proposed in the consultation document to be the more practical option.
• Expected timing for introducing Retirement CDC:

A timeline included in the consultation paper suggests the following:

• Mid-2026: consultation on draft regulations to enable Retirement CDC;
• Early 2027: TPR consultation on amendments to the Code of Practice relevant to Retirement CDC; and
• Early 2028: legislation implementing Retirement CDC and the updated Code of Practice to come into force.

As a reminder, the guided retirement duty is expected to apply to single employer trusts and group personal pensions from mid-2028.

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HMRC Pensions Newsletter 174

HMRC has issued Newsletter 174, which includes information on the following.

UK resident pension scheme administrators

• Schemes are reminded that, from 6 April 2026, all pension schemes administrators (PSAs) of a UK registered pension scheme must be UK resident. Using a UK postal address or a UK care/of address is not sufficient. "Administrator" in this context refers to the person(s)/entity which is deemed by legislation to be the scheme administrator for the purposes of the Finance Act 2004 (the so-called "tax administrator" - usually the scheme trustee).
• The Newsletter sets out various actions which a non-UK PSA must take before the 6 April 2026 deadline, including:
  • Appointing a UK resident PSA and adding them to the scheme on HMRC’s Managing pension schemes service; and
  • Removing the non-UK PSA from HMRC’s systems.
• The appointment of a practitioner authorised to act on a non-UK PSA’s behalf will automatically cease when the non-UK PSA is removed as scheme administrator. To remain authorised to act for the scheme, the practitioner must be appointed by the UK resident PSA.

Returning tax free lump sums (Pension Commencement Lump Sums or Uncrystallised Funds Pension Fund Lump Sums)

• Schemes are reminded that under tax legislation it is not possible to reverse the tax consequences of taking a tax free lump sum by returning the lump sum to the scheme, even if this is done by exercising cancellation rights under the terms of the scheme.
• This reminder follows an article in Newsletter 173, issued in parallel with the Financial Conduct Authority (FCA) in September 2025. This Newsletter explained that:
  • Where FCA rules require cancellation rights to be included (for example, in a contract to transfer a pension), then exercising the cancellation rights will have no tax consequences for the individual; but
  • Where cancellation rights are not a requirement of FCA rules (for example, on taking a tax free lump sum), tax consequences cannot be reversed after the lump sum is paid. A member who cancels a contract providing for both a transfer and the payment of a tax free lump sum will suffer the tax consequences of taking the lump sum.
• A lump sum which fails to meet the conditions for a pension commencement lump sum (PCLS) or uncrystallised funds pension lump sum (UFPLS) will be an unauthorised payment.
• A lump sum which is classified as an unauthorised payment will not use up the member’s lump sum allowance (LSA) or lump sum and death benefit allowance (LSDBA), because making an unauthorised payment is not a benefit crystallisation event (BCE).
• HMRC considers that it made the tax consequences of returning a PCLS or UFPLS clear in Newsletter 165, issued on 5 December 2024. Where a PCLS or UFPLS was returned after this date, HMRC may challenge alternative interpretations of the tax consequences. Schemes are expected to notify members of their reduced LSA and LSDBA, or to report unauthorised payments to HMRC.
• Schemes which offer cancellation rights are expected to ensure that members are aware of the tax consequences of exercising those rights.

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Authored by Jill Clucas.