I thank noble Lords for tabling the amendments. I turn first to the proposed amendments to Clause 14. The fundamental aims of the financial sustainability requirement are to avoid disruption to members through CDC schemes failing because of inadequate financial planning or resources and to ensure that, if a scheme experiences a triggering event, the costs of dealing with that and continuing to run on the scheme for an appropriate time can be dealt with. These costs may include costs of transfer and wind-up, if that arises.
As these will be new schemes, it is possible that the up-front costs of establishing and running a CDC scheme may not be covered in full by the charges paid by members. Similarly, if a scheme experiences a triggering event, it might also find that it has insufficient resources to meet the cost of resolving that event without further recourse to members’ funds. The financial sustainability requirement is intended to protect against these risks.
It is envisaged that there will be a variety of mechanisms for financing these costs. As the noble Lord, Lord McKenzie, identified, those are likely to involve support from establishing and connected employers. We will consult on this matter before bringing forward regulations, but a range of options is likely to be available—for example, an amount held in escrow or contingent assets.
Envisaged regulations made under Clause 14(3) will ensure that the regulator has sufficient evidence to satisfy itself that the financial sustainability criterion is met and that members are protected. We intend that these regulations will require evidence of any financial commitment by the establishing employer or connected employers and that the scheme has access to the financial resources it needs, including in the event of employer insolvency. If the regulator is not satisfied that the scheme is financially sustainable, the scheme will not be authorised to operate by the regulator, so it is in an employer’s interest to ensure that its scheme meets the envisaged requirements. We do not intend to require CDC schemes to hold a minimum level of capital to meet relevant cost. If authorisation is to work effectively, the Pensions Regulator must be able to consider the risks posed by each scheme to determine whether adequate mitigations are in place. I believe that that is a fairer and more effective approach.
I turn to my noble friend Lady Altmann’s amendment. It would add to the illustrative list of what regulations may require the regulator to consider when deciding
whether the processes used to run the scheme are sufficient to ensure it is run effectively. I appreciate the importance of good systems—