DB schemes face 120% increase in General Levy to fund increased supervision

The DWP has published a further consultation on revised proposals for the General Levy in which it is proposing substantial increases in the levy rates and changes to the structure of the levy itself.

The General Levy on occupational and personal pension schemes is intended to cover the cost of funding the Pensions Regulator, the Pensions Ombudsman and the Money and Pensions Service. The DWP is already facing a deficit of £80m in its budget by 2021 due to historic shortfalls between the amount recovered via the levy and the costs of funding these bodies to date. Those costs are set to increase in the coming years, due to the expanding roles of all three bodies, and the DWP estimates that if levy rates remained unchanged, there would be a deficit of around £230m by April 2024.

In light of this, the DWP is proposing, once again, to increase levy rates having pulled back from doing so earlier this year. It is also proposing to restructure the levy so that a greater share of the cost is borne by DB schemes which face a 120% increase in the General Levy over the next three years.

Background

The levy rates were last increased in 2008/2009. The rates were then reduced by 13% in 2012/13 and have remained at the same level for most pension schemes since then. A new, lower, levy rate for schemes with 500,000 members or more was introduced in 2017/18.

Amending regulations were laid in February 2020 that would have increased the levy rates by 10% from 1 April 2020 to begin to address the accumulated deficit. However, these regulations were subsequently revoked. The Government decided that the increase in the levy rates should not proceed, given the unprecedented circumstances following the outbreak of the Covid-19 pandemic. It also faced opposition from master trusts who argued that members of auto-enrolment schemes were being asked to pay a disproportionate amount of the levy relative to the costs of regulating such schemes.

Latest proposals

The DWP believes the levy rates have not kept pace with changes in the pensions industry and the regulatory landscape such as the strengthening of the regulatory framework and the Pensions Regulator’s powers, increased demand for pensions guidance and dispute resolution and the development of the pensions dashboard.

Therefore, in its latest consultation, the DWP has outlined three different options to cover the increased costs associated with these developments.

Option 1 - increase rates and introduce separate levy rates for defined benefit, defined contribution, master trust and personal pensions schemes

This option would see an increase in and realignment of the levy rates to recognise that different types of scheme require different levels of supervision. Consequently, there would be different levy rates for DB schemes, DC schemes, master trusts and personal pension schemes.

Recognising the impact that Covid-19 has had and continues to have on pension schemes, the DWP proposes only moderate increases in rates for 2021/22, at 10% for DB and DC schemes, and 5% for master trusts and personal pension schemes. However, higher increases would be introduced in 2022/23 and 2023/24 with DB schemes seeing the largest of these.

The Government has said it will undertake annual reviews of the proposed, higher rates to take into account, among other things:

• anticipated levy receipts
• the agreed spending plans of the bodies and any surplus or deficit that may have accumulated
• external factors such as the projected growth in DB scheme membership and consolidation
• future changes to planned expenditure to reflect new policy decisions
• any future changes in the pensions landscape, and
• corresponding changes in the priorities of the supervisory regime.

Option 2 - increase rates and introduce a separate, lower set of levy rates for master trusts

Option 2 would also see an increase in rates but there would be a separate, lower set of levy rates for master trusts (compared with other occupational pension schemes). This is justified on the basis that, while master trusts are subject to ongoing supervision, they are also required to pay a fee as part of the authorisation process.

Other DC occupational pension schemes would be subject to the same rates as DB schemes (meaning they would pay significantly more under Option 2 than Option 1) with a separate rate continuing to apply to personal pension schemes (as is currently the case).

Option 3 - retain existing levy structure and increase rates

The final proposal would see the levy increase but with the existing levy structure retained.

Government’s Preferred Approach

The consultation makes clear that the Government is attracted to option 1 as it believes that DB schemes should see the largest levy rate increase to reflect the complexity of DB schemes, the level of supervision required and the extended role and powers being given to the Pensions Regulator. This approach would also reflect the relative affordability for the DB and DC sector, the levy as a proportion of scheme assets and the impact on scheme members. The Government also supports lower levy rates for master trusts.

In addition, the Government believes that Option 2 does not reflect the relative complexity of DB schemes, or the past and current focus of the supervisory regime on such schemes and that Option 3 would not address the feedback received by the Government following its 2019 General Levy consultation, namely, that the levy structure should be more equitable and that the cross-subsidies within it should be addressed.

Comment

Although the timing of these proposed increases is far from ideal, given the deficit that already exists in the DWP’s coffers and the fact that this is expected to increase at the rate of £50m per year if no action is taken, it is clear that the levy rates (which have not been increased for over a decade) need to be adjusted.

The Government’s preferred option seeks to reflect the relatives costs associated with regulating different types of scheme. However, the Government may face opposition from DB schemes which will bear the brunt of the proposed increases (as it did from master trusts earlier this year). This time, however, we expect the Government to press ahead with its plans to reform the General Levy having taken time to reconsider its options.

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