Discussion Paper WP1904

Summary
This article considers whether a collective defined contribution pension scheme (a “CDC scheme”) provides “cover against biometric risk” or “guarantees … a given level of  benefits” for the purposes of Article 13(2) of EU Directive 2016/2341 (the “IORP II Directive”) or  its predecessor , IORP I Directive  2003/41/EC), Article 15(2). If no such cover and no such guarantee are provided, then a CDC scheme is not required to comply with the technical provisions, buffer and other funding requirements applicable to an IORP which is classified as a “regulatory own fund” in Article 15 of the IORP II Directive. There is a linked, and for current practice, relevant issue: if a pension fund operates a CDC pension scheme that does not qualify as a regulatory own fund IORP, it would be classified as a “special investment fund” for EU VAT Directive purposes with the associated beneficial VAT treatment that is enjoyed by a retail collective investment scheme. Furthermore this VAT treatment is available for all CDC schemes. The article explores this issue by reference to CDC schemes established in The Netherlands and against the background that the UK is planning to introduce legislation permitting CDC schemes to be established in the UK. The article compares some of the Dutch legislation regulating CDC schemes established in The Netherlands with the corresponding position in the UK in relation to the legal form used for a pension scheme, the protection of accrued rights under a pension scheme, the approach to funding defined benefit pension schemes (including, for this purpose, Dutch CDC schemes) and the different approaches to dealing with the insolvency of the employer in relation to a pension scheme (including the difference between the UK legislation for a Pension Protection Fund and The Netherlands not legislating for a pension protection fund). The article also notes that the essence of a CDC scheme is that the benefits are not guaranteed. Instead, the benefits are adjusted in accordance with legally binding rules which provide a mechanism for bringing the value of the target benefits back into line with the value of the assets of the scheme. The employer has no obligation to make any additional deficit repair contributions. The article notes that CDC schemes may also be referred to as Defined Ambition schemes or Target Benefit schemes.

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