Industry anger as new FCF levy goes ahead costing MTs £130mn

In a consultation published in November, the Department for Work and Pensions proposed to raise the levy that funds the FCF, managed by the Pension Protection Fund, from the current charge of 75p to £1.80 a 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 with regards to pension scams. 

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.

Master trust members are funding fraud compensation but are very unlikely ever to be able to claim it

Phil Brown, B&CE

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 £358mn, but the FCF itself only has assets totalling £33.9mn.

In April 2021, the FCF levy was raised to the maximum allowed by law at 75p per member and 30p for master trust members.

Considering the levy alone would not be sufficient to cover all claims, the PPF secured a loan from the DWP for the FCF, which is expected to cover 122 schemes and amounts to approximately £250mn over the period 2021-25.

Considering the loan needs to be repaid by 2030-31, the DWP launched a consultation on an uprate to the fraud compensation levy, which will now go ahead, with the new rules having been laid in parliament.

‘Goalposts have been moved’

The consultation response, published on March 11, acknowledged that from the 11 responses received — including master trusts such as Now Pensions and Nest, and industry bodies such as the Association of British Insurers — nine respondents did not support the government’s funding proposal.

According to the document, some “respondents expressed the view that the pensions liberation claims brought into the scope of the FCF by the Dalriada judgment were not envisaged when the FCF was created and that ‘the goalposts have been moved’”.

In the light of this, nine respondents argued that there should be a structural review of the fund and/or its levy, suggesting instead models that would “take account of scheme assets and of the risk of a scheme becoming a charge on the FCF, charging for active members only and applying a banding approach based on scheme membership”.

Seven respondents went further and advocated for the increase in the FCL ceiling to be suspended pending the outcome of such a review, adding that a delay of one year would be sufficient for this purpose.

In its response, the DWP said: “Although the government believes the increase in the FCL ceiling is pressing and has decided not to delay implementation, nor undertake an immediate review of the FCF/FCL, it will […] monitor the position going forward. It may then decide that a full review is warranted.”

Master trusts to brunt majority of costs

In its cost impact analysis, included in its consultation response, the DWP estimates the increase in the FCF levy will cost pension schemes £260mn over the next nine years.

Of this total, £130mn will be paid exclusively by master trusts, due to the number of members and different pots they manage.

There is also the risk that member charges will increase, with eight respondents saying they would pass additional costs of the FCL on to members.

Nevertheless, the DWP stated that “competitive pressures within the market suggest that not all additional costs will be passed on to members”.

Five respondents to the consultation also argued that it is “unfair for master trusts to be required to contribute to the FCF” when “it is hard to see how this scheme type could benefit from the existence of fraud compensation”.

This is an opinion shared by Phil Brown, director of policy at B&CE, provider of The People’s Pension, who told Pensions Expert: “This is a missed opportunity for a serious review of fraud compensation. 

“The DWP’s response merely addresses the funding shortfall in the FCF, but that means other major problems in the approach to pension fraud compensation remains unfair, as people with substantially similar claims may receive totally different treatment. 

“Master trust members are funding fraud compensation but are very unlikely ever to be able to claim it.”

In its response, the DWP stated: “All occupational pension schemes, however well-governed, derive benefit from the existence of robust fraud compensation arrangements, which increase the level of consumer confidence in pension saving.

“These arrangements, underpinned by the FCL, also incentivise schemes to take thorough precautions against fraud and dishonesty, both within the scheme and when transferring members to other schemes.”

Joe Dabrowski, deputy director of policy at the Pensions and Lifetime Savings Association, noted that despite the trade body fully supporting that victims of pension scams and shams should be fairly compensated, “the new rates confirmed by the government for 2022-23 will amount to a more than £5mn per annum increase for some schemes, give very little notice to schemes and — because they ask automatic enrolment master trusts to pay a disproportionate amount in contributions — will ultimately see the costs borne unfairly by savers with the lowest balances”.

He added: “The PLSA has repeatedly argued that the fraud compensation regime is not fit for purpose, and requested a one-year delay to the levy hike to allow time for a proper review to build a more robust and future-proofed compensation regime that offers protection for all pension savers.

“We are disappointed that the government has seen fit to ignore these concerns and follow through with the unfair increase, despite near universal opposition among respondents.”

In its response, the DWP recognised “that there are strong views about the implementation date of the amendment to the FCL ceiling and the associated suggestion that a full review of the FCF should be mounted”.

However, after taking “a detailed analysis of the responses” and considering “a range of external and internal data held by the department”, it concluded that “while the levy places a direct cost to business, it will provide an equal benefit to schemes and members affected by fraud”.