UK pensions reform paves way for unconnected employer schemes and retirement-only CDC options

The UK Department for Work and Pensions (DWP) is advancing significant reforms to collective defined contribution (CDC) pension schemes, aiming to broaden their scope and accessibility. Central to these developments is the introduction of legislative changes enabling CDC schemes to extend to unconnected multiple employer schemes (UMES) and permitting the establishment of retirement-only CDC arrangements.

Set to come into effect from 31 July 2026, the new regulations will permit occupational pension schemes with multiple, unconnected employers to operate under the CDC framework, subject to authorisation by The Pensions Regulator (TPR). This marks a departure from the existing model, which restricts CDC schemes largely to single employers or connected employer groups. The DWP intends for two distinct authorisation routes: the current framework for single or connected employer schemes, and a new CDC UMES framework tailored for unconnected employers. While based on the existing authorisation criteria, the UMES framework will introduce additional or amended requirements where necessary.

An important feature of the CDC UMES model is its “whole-life” provision, covering both the accumulation of contributions and the decumulation phase during retirement. Trustees of these schemes will need to ensure that actuarial equivalence is maintained, with expected accrual matching contributions over a defined period. Interestingly, the methodology for actuarial calculations can differ from that used in scheme valuations, potentially allowing for gender-neutral accrual rates despite gender-based valuation assumptions. These mechanisms are intended to balance both the security and fairness of member benefits, which will undergo annual valuation and adjustment to align asset levels with projected costs.

Another structural innovation involves the appointment of a scheme proprietor distinct from the trustees, to manage the scheme’s business and commercial interests separately from member advocacy. For instance, an authorised Master Trust wishing to add a CDC UMES section will have to apply under the new framework and may appoint an existing scheme funder or strategist as proprietor, provided they meet financial sustainability criteria. This separation aims to mitigate conflicts of interest and enhance governance standards.

Marketing and communication by CDC UMES trustees will be strictly regulated to prevent misleading promotion. Trustees will not be permitted to advertise or promote the scheme to prospective employers, reinforcing the emphasis on transparency and responsible governance.

Parallel to these reforms, the DWP is also progressing towards enabling retirement-only CDC schemes. These will operate as sections within authorised Master Trusts or UMES, catering exclusively to pensioner members without ongoing contributions or accrual. The design of these retirement CDC schemes allows for pooling of longevity risk and investment in a higher proportion of growth assets, offering potential for higher returns. Benefit structures are expected to offer flexibility, including options for lump sums, death benefits, and cohort-based terms to minimize cross-generational subsidy risks. Importantly, flat rate pensions are not favoured due to their susceptibility to annual adjustment cuts, which could undermine member confidence.

Membership access for retirement CDC schemes is envisaged to operate via a wholesale market model. Members would join through selection by their DC scheme trustees, either as part of a guided retirement default or through formal partnerships offering choice. Transfers of DC pots to retirement CDC schemes will be permitted on an actuarially equivalent basis, aligning expected benefits with transfer values. The Pensions Act 2021 mandates a clear separation between CDC benefits and other pension benefits, necessitating dual-section trust arrangements for Master Trusts offering both DC and CDC solutions.

Looking ahead, the timetable proposed by the DWP anticipates consultations on draft regulations by mid-2026, followed by TPR’s updated Code of Practice consultations in early 2027, with the legislative framework scheduled to come into force in early 2028. Of note, the guided retirement duty will apply from mid-2028 to single employer trusts and group personal pensions, promoting the integration of CDC solutions within retirement planning.

In addition to these pension scheme reforms, HM Revenue & Customs (HMRC) has issued its Pensions Schemes Newsletter 174, which serves as a timely reminder and clarification for scheme administrators. From 6 April 2026, all administrators of UK registered pension schemes must be UK resident, a requirement that extends beyond simply providing a UK postal or care-of address. Non-UK resident administrators must appoint a UK-resident scheme administrator before this deadline and ensure that any practitioners previously authorised to act on their behalf are reappointed by the UK-resident administrator.

Moreover, HMRC underscores that tax legislation does not permit reversal of the tax treatment on tax-free lump sums once paid, even if the payment is returned or cancellation rights are exercised under scheme rules. This clarification follows previous FCA guidance and aims to prevent misunderstandings regarding the tax consequences of returning Pension Commencement Lump Sums (PCLS) or Uncrystallised Funds Pension Lump Sums (UFPLS). Lump sums not meeting the required conditions will be classified as unauthorised payments, with corresponding reporting obligations.

Together, these regulatory developments reflect a multi-faceted approach by UK authorities to expand pension scheme options, enhance governance and consumer protections, and clarify tax administration. By enabling broader CDC participation through UMES and retirement-only schemes, while ensuring scheme administrators meet residency requirements and tax rules are firmly upheld, the UK is reshaping its pension landscape to better support retirement income security in a rapidly evolving context.