Defined benefit schemes face a 120 per cent general levy increase by 2024 proposed in a new consultation launched on Wednesday, while master trusts will be granted a different rate.
The general levy is paid by all registered occupational and personal pension schemes, and funds arm’s-length bodies like the Pensions Regulator, as well as the Pensions Ombudsman and the Money and Pensions Service.
A combination of a 12-year freeze in levy rates, reductions in 2012 and for large schemes in 2017, along with widened mandates for the funded bodies, has led to a hole opening up in the Department for Work and Pensions’ finances.
This is a significant increase for almost any non-commercial entity to bear and shows how much DB schemes will be leant upon to plug the funding gap
Tim Box, LCP
Attempts to plug this gap were foiled when, after vociferous opposition from master trusts, a 10 per cent rise in rates was abandoned in March this year. Master trusts said they are unfairly targeted by the current regime, due to their large memberships, low average pot sizes, and the payments they already make in order to gain authorisation and undergo regulatory supervision.
Nonetheless, the DWP said that having failed to identify any areas where current spending on regulation is unwarranted, rates need to rise.
Levy rates to differ according to scheme type
The government’s preferred option is to calculate levy payments differently for DB, defined contribution, master trusts and personal pension schemes. The levy would still be based on the number of members in a scheme, but different rates would account for the increased level of resource needed to regulate and support different sectors.
DB schemes and DC plans that do not qualify as a master trust would face a hike of 10 per cent for 2021, while master trusts and personal pensions would only have to pay an additional 5 per cent. The government said this would begin the process of balancing the books without putting undue strain on schemes during a difficult time.
However, sharp increases are forecast in following years, with the initial hike and increases for an additional three years set to be introduced in the same regulations.
According to calculations from LCP for Pensions Expert, DB schemes would see an increase in the levy of between 67 per cent and 69 per cent in 2023-24, followed by 19 per cent in the following year. Overall, these pension funds would see their levy payments increase by 120 per cent over the next four years.
Occupational DC schemes would see a jump of between 50 per cent and 52 per cent, while master trust levy payments would rise by around 9-10 per cent.
The DWP justifies the difference in rates proposed in this option as being due to a “a more extensive realignment in the levy rates, to recognise that the supervisory regime directs more operational effort towards some scheme types than others”.
Tim Box, a senior consultant at LCP, explained that a DB scheme with 50,000 members would pay “£83,500 more in levies over the next three years in total than a master trust of the same size”.
He said: “This is a significant increase for almost any non-commercial entity to bear, and shows how much DB schemes will be leant upon to plug the funding gap. This may reflect a view in the government about the relative amount of regulatory involvement they expect to have with different types of schemes, or it may simply be a judgment about who can best afford to bear increased levy costs.
“Whichever of these is the case, the government’s proposals are likely to receive pushback from those schemes most adversely affected.”
New levy rates for master trusts
The consultation also proposes other options to reform the general levy, such as having a lower set of levies specific for master trusts.
The DWP stated that these schemes are subject to an additional authorisation process for which a fee is charged, which is why they could have a separate set of rates.
Nevertheless, master trusts would see the same rate increase in both options. The big difference would be for DC schemes, which would face a similar rise to DB schemes — around 120 per cent — under the second option.
Schemes hit back at DWP’s levy ‘knee-jerk solutions’
Several pensions experts have criticised the government’s consultation on the general levy on pension schemes, arguing that the Department for Work and Pensions has proposed ‘knee-jerk solutions’ that are not fit for purpose.
Darren Philp, director of policy and communications at Smart, noted that while the timing of the increases is disappointing due to the current economic climate, “it is welcome that the DWP has listened to feedback and is proposing a fairer distribution of levy financing”.
He said: “A lot of the regulator’s efforts are on DB and protecting scams, for example, so we didn’t think it was fair for auto-enrolment savers to be cross-subsidising the finance of the levy for people with much larger pension pots.”
The government also proposed a third option, which would see the existing system retained but levy rates increased. However, this model has effectively been precluded by the government’s decision not to implement this solution this year, having received complaints about the inequity of the rates structure.
