The Department for Work and Pensions is consulting on changes to the fraud compensation levy, which will see pension schemes pay more than double the current fee as pension scam claims rise.
In a consultation published on Monday, the DWP is proposing to raise the levy that funds the Fraud Compensation Fund, managed by the Pension Protection Fund, from the current charge of 75p to £1.80 per member for pension schemes, and from 30p to 65p for master trusts.
The FCF, set up in 2004, was designed to compensate pension schemes that suffered losses as a result of dishonesty.
However, since its inception, doubts about the eligibility of claimants have caused significant delays to its operations in regards to pension scams. In its entire 16-year history, the FCF has so far compensated only 10 schemes to a value of around £5m.
We think the government needs to review the Fraud Compensation Fund and the levy underpinning it as a matter of urgency
Darren Philp, Smart Pension
The principal difficulty concerned scam schemes — vehicles set up specifically for the purposes of fraud — which may not have had a traditional link to an employer.
That issue was settled in November 2020 after the PPF and Dalriada sought clarity from the High Court, which ruled that any occupational scheme liable to pay the FCF levy could qualify for compensation in the event of fraud.
Following the court ruling, nine claims totalling £40m were received, with more expected following confirmation of eligibility criteria.
The PPF is “aware of” an additional 117 possible claims with a potential value in excess of £358m, but the FCF itself only has assets totalling £33.9m.
In April 2021, the FCF levy was raised to the maximum allowed by law of 75p per member and 30p for master trust members.
However, the PPF noted in its annual report that “this levy alone would not be sufficient to fund all potential claims, should they crystallise, so we have been working with the DWP to resolve the funding gap by securing a loan from the DWP to the FCF”.
With legislation allowing the secretary of state the power to make a loan to the board of the PPF receiving Royal Assent on October 20, the DWP is now consulting on an uprate to the fraud compensation levy so that the loan can be repaid by 2030-31.
The loan is expected to cover 122 schemes and amounts to approximately £250m over the period from 2021 to 2025, the DWP stated.
If no changes were made to the levy, the loan “would not be recovered in full until approximately the 2040s”, it added.
“This would be an unreasonable length of time for the FCF to be in deficit and would be contrary to the tenets of government accounting,” the DWP noted.
“The government does not believe that preserving the current levy ceiling is a realistic option and so it is not consulting on such a possibility.”
DWP rebuffs changes to levy structure
The DWP acknowledged suggestions for the levy to be restructured, so that it is no longer based on the number of members in each occupational pension scheme, as there are claims that master trusts with large numbers of members, or small pots, or both, are disadvantaged by the current structure.
Darren Philp, director of policy at Smart Pension, agrees with this suggestion. “While it is only right that victims of pension scams that are eligible to claim under the FCF are able to do so, hammering auto-enrolment savers and providers by funding the deficit on a per member basis is unjustified, inequitable and unfair,” he said.
“It beggars belief that the government thinks it is equitable that savers in auto-enrolment master trusts, often contributing minimum contributions, and with the smallest pots, should be disproportionately paying for the costs of this type of fraud, even with a lower per member cap, when compared with the assets under management in other types of schemes.
“We think the government needs to review the FCF and the levy underpinning it as a matter of urgency.”
However, the DWP said that due to the current structure with a “substantially lower levy” for master trusts, “there are no plans to alter this arrangement, which is expected to mean that the fraud compensation levy burden to be absorbed by master trusts is substantially lower than the burden to be absorbed by most other schemes”.
David Brooks, technical director at Broadstone, noted that the proposed increase will make the “FCF levy a more significant expense for pension schemes and highlights the size of the issue of pension scams”.
PPF pays out £1bn but fraud compensation claims raise concerns
The Pension Protection Fund paid out £1bn in member compensation in 2020-21, but there are concerns as potential claims with a value in excess of £358m against its Fraud Compensation Fund vastly exceed the money available to pay them, according to the PPF’s annual report.
“However, it is a difficult one to balance. As usual, and as we see with the Financial Services Compensation Scheme in the advisory market, it is the remaining pension schemes that compensate for the loss caused by the immoral and corrupt that commit pension fraud in the first place,” he said.
“While hard to take, I think it is through this prism that we should see this increase. Previously it has been very difficult for those that lose their pension savings to get compensation. The ruling last year that allowed schemes to claim through the FCF is another important route for those victims.
“One hopes that greater awareness of scams and their methods will make future increases unlikely, but with the size and scope of scams not entirely clear to any of us, we may need to prepare for future rises, if not a complete rethink of the model.”
In regard to calls for a substantial review of the levy structure, the DWP said: “The government believes that the fraud compensation levy and FCF continue to work broadly as intended.”
