With a Department for Work and Pensions (DWP) consultation into the general levy closing in the UK today, the industry has voiced concern about the proposal to charge an additional fee of £10,000 (€11,465) to schemes with less than 10,000 members.
On 2 October 2023, DWP launched a public consultation seeking views on changes to the structure and rates of the general levy on occupational and personal pension schemes.
DWP sought views on three options.
The first option looked at continuing with the current levy rates and levy structure. It would see rates freeze at this year’s rates until tax year 2026 to 2027 and retain the four categories of rate payer:
- defined benefit (DB) schemes;
- defined contribution (DC) schemes other than mastertrusts;
- personal pensions schemes.
Option two explored whether the government should retain the current levy structure and increase rates by 6.5% per year. This option would bring the cumulative deficit back into a compliant level by 2031.
Finally, the third option sought views on whether the rates should be increased by 4% per year across all schemes. This option would add a premium of £10,000 to schemes with a membership of less than 10,000.
In particular, it was the third option that raised concerns among the industry.
David Robbins, director of WTW’s retirement business said there are three “main problems” with the proposals.
He said: “First, they assume that the gap between income and expenditure must be bridged solely through higher levies. Is there really no scope to reduce costs – for example, does the regulator need to spend as much on policing DB schemes when funding levels have dramatically improved?”.
The second problem, according to Robbins is that the proposal suggests fining small schemes for existing, when many will have no “practical option” to wind-up before 2026 and when economies of scale are not the only consideration affecting member outcomes. He explained some small DC schemes will have guaranteed annuity rates, while DB consolidation involves exchanging the employer covenant for alternative security, which will make sense for some schemes but not others, he said.
Lastly, he said the proposals “ignore” the likelihood that making schemes pay for automatic enrolment enforcement following a further consultation will feed into charges paid by members.
David Everett, head of pensions research at LCP said that the option to charge additional £10,000 to smaller schemes is ”disproportionate and cannot be justified”.
He said: ”It is disproportionate because it has no regard to the cost of regulating smaller schemes and takes no account of how well they may be run. And we don’t feel it is justifiable as the levy’s purpose is to fund the appropriate bodies, not to force consolidation by the back door which is the clear aim here.”
Everett added that consolidation for both DB and DC should be taken forward through legislation specifically designed for this purpose, and which enables those schemes that have good grounds to consolidate to do so.
He continued: “Legislating for a flat £10,000 penalty for those that cannot or have no reason to wind up before April 2026 is not the way to go.”
ACA also voices concerns
Peter Williams, pensions schemes committee chair at the Association of Consulting Actuaries (ACA) said that ACA also cannot support option three.
He said: “The general levy is raised under powers set out in section 175 of the Pension Schemes Act 1993. This explicitly states that the levy’s purpose is to meet the expenditure of the Pensions Ombudsman, the Pensions Regulator and the pensions guidance functions of the Money and Pensions Service.
“We are not lawyers, but it seems to us that the additional premium is being raised, not for any of these purposes, but to advance the cause of consolidation, which is a DWP policy matter.”
Option three causes more concern
Faye Jarvis, Chair of the Society of Pension Professionals legislation committee also expressed concerns over option 3. She said that the proposals will be “punitive” to small schemes and “take no account” of how well-governed they are and “ultimately have a detrimental impact on the members of some schemes”.
Jarvis added that there are some schemes that cannot wind-up or wind-up quickly, and so have no means of mitigating the impact of this cost.
She said: “We urge the DWP to reconsider its approach, working with industry on more nuanced reforms, without unjustly penalising small or responsible schemes.’’
However, Association of Professional Pension Trustees (APPT) said option three could be “viable” if it was amended to recognise the governance efficiencies and other benefits for those schemes that use accredited professional pension trustees.
APPT takes a different view
APPT chair Harus Rai said: “The consultation makes it clear that the rise in the general levy is required to meet the cost of raising governance standards, particularly for smaller schemes. The Pensions Regulator has previously stated that governance standards for schemes with a professional trustee are higher. Further, The Pensions Regulator, DWP and HMT have all been supportive of the accreditation of professional trustees.”
Rai added that all professional trustees should be accredited so scheme members and sponsors can be assured that the governance standards of their scheme are of high quality.
He said that by reducing or removing the £10,000 flat charge under option three for those schemes with an accredited professional trustee, DWP can achieve three things.
Firstly, it can encourage smaller schemes to appoint an accredited professional pension trustee which in turn will lead to higher governance standards for the scheme.
It can also encourage a wider group of professional pension trustees to become accredited helping to raise the standards of the professional trustees working with pension schemes.
It can also provide greater oversight of the work professional pension trustees undertake in respect of these schemes, he said.
Rai continued: “While not fully endorsing accreditation, the above change to option three would lead to higher standards of governance for smaller schemes and would provide a nudge to professional pension trustees to become accredited.”