Experts concerned about changes to the general levy
Pension experts have raised concerns about a government consultation to increase pensions schemes’ general levy.
The Society of Pension Professionals (SPP), the Association of Professional Pension Trustee (APPT) and the Association of Consulting Actuaries (ACA) are a growing number of experts who have raised alarm over the Department for Work and Pensions’ (DWP) consultation on proposals for change the structure and rates of the general levy on occupational and personal pension schemes from April 2024, 2025, and 2026.
The document entitled ‘The Occupational and Personal Pension Schemes (General Levy) Regulations review 2023’ sets out three possibilities including option one, which involves continuing with the current levy recovery rates and levy structure.
Option two includes retaining the current levy structure and increasing rates by 6.5% per year for all schemes.
But option three, which has been identified as the DWP's preferred option, includes increasing rates for all schemes by four percent per year, and adding an additional premium rate payment for small schemes with memberships under 10,000.
According to the consultation document, most schemes with under 10,000 members have two to eleven members and are frequently found in research to have lower governance standards, lower knowledge of pensions and compliance levels. But option three would introduce the premium payment in 2026, allowing smaller schemes time to adapt and consolidate, giving two years to consider whether this is in their members’ interests. Interestingly, there has been overwhelming opposition to option three.
The industry responds
A statement from the SPP said it prefers option three and raised serious concerns about option three, especially regarding the £10,000 premium for small schemes.
A letter signed by Faye Jarvis, chair of SPP’s legislation committee, and Fred Emden, chief executive of the SPP, said: “The premium of £10,000 would be excessively penal to small schemes that do not need, cannot or would need extra time to consolidate. The premium takes no account of whether the scheme is well governed. It is also important to note that not all schemes can or should consolidate. Some schemes provide advantageous benefits to members such as guaranteed annuity rates or investment returns that would likely be lost on consolidation.
“The premium would also impact small self-administered schemes (SSAS) that are designed specifically to allow investment in more illiquid assets that are often connected to the members’ business and so may not be easy to sell. Indeed, SSAS are exempt from some regulatory requirements. Given they are subject to a lighter regulatory regime, it seems difficult to justify why they should be subject to the premium.”
The APPT said it also prefers option two, but said the general levy in option three ‘could be viable’ if the flat charge is cut for small schemes using an accredited professional trustee.
It said by reducing or removing the £10,000 flat charge under option three for those schemes with an accredited professional trustee, this would encourage smaller schemes to appoint an accredited professional pension trustee which in turn will lead to higher governance standards for the scheme. It would also encourage a wider group of professional pension trustees to become accredited and help raise the standards of the professional trustees working with pension schemes.
In his formal response, Harus Rai, chair of the APPT, wrote: “Based on the options presented, we prefer option 2.
“We also believe that option 3 could be viable if it is amended to recognise the governance efficiencies and other benefits for those schemes that use an accredited professional pension trustee.
“The Pensions Regulator, DWP and HMT have all been supportive of the accreditation of professional trustees. From the APPT’s perspective, we believe that all professional trustees should be accredited so scheme members and sponsors can be assured that the governance standards of their scheme are of a high quality.
“Whilst not fully endorsing accreditation, the above change to option 3 would lead to higher standards of governance for smaller schemes and would provide a nudge to professional pension trustees to become accredited.”
A similar notion was echoed by the ACA, which said it prefers option two, while bemoaning the lack of transparency on emerging deficits.
Writing to the DWP, Peter Williams, chairman of the ACA’s pension schemes committee, said: “We are disappointed that you have not published any evidence of the current deficit, the variances that have arisen since the general levy was fixed for the three years commencing 1 April 2021, and how the deficit is expected to develop over the current remediation period if no action is taken.
“We think that you owe it to levy payers to be much more transparent about these matters and to publish simple accounts each year of revenue raised from each of the four sectors and expenditure incurred from each of the regulatory bodies that are set against the general levy, before going on to provide simple projections on the same basis over the proposed remediation period.
“In addition, because you are seeking to recoup a material accumulated deficit, we think you owe it to levy payers to set out what the general levy should look like once that deficit has been recovered and the planned level of increases going forward for inflationary and other unavoidable elements.”
No structural review
More disappointment was voiced by Joe Dabrowski, deputy director policy for The Pensions and Lifetime Savings Association (PLSA), who blasted the government for not conducting a full structural review of the general levy.
He said: “It’s disappointing that the government has not listened to the calls from pension schemes to conduct a full structural review of the general levy, and has instead proposed radical approaches that overburden the smallest schemes and master trusts.
“The PLSA firmly believes there should be no major increase in the general levy without due transparency and accountability on the part of government and regulated bodies.
“The proposals still leave automatic enrolment providers paying on a per-member basis when they currently have mass membership and comparatively low assets under management. Under these proposals, master trusts would see their total contributions rise by 33.5% in just three years, even with the per-member cost of the levy remaining unchanged.”
He added that the proposals do not take account of the challenges of inactive small pots, which he hoped to see excluded from per-member calculations. He also added that the new proposal for a £10,000 minimum fee to be added to schemes seems inappropriate and unfair to small schemes.
Dabrowski added: “The most appropriate way forward now is to freeze all levies at current levels until such time as a full and thorough structural review can be conducted to ensure schemes are not hit by unfair or sharply rising costs.”
The three options were previously agreed by ministers after estimates from the DWP revealed that if levy rates were to remain unchanged then there would be a deficit of over £200m by 2031.
