General levy increase gets broadly negative response from industry

Holly Roach
clock
Concern was raised over whether schemes can actually absorb the cost of the levy increase
Image:

Concern was raised over whether schemes can actually absorb the cost of the levy increase

Key points

At a glance:

  • The industry is generally negative about the proposals to increase the levy, with experts saying it is ‘ill-considered’ and ‘concerning’
  • Some industry members have said a wider review of the levy structure is crucial
  • Concern was also raised over whether schemes can actually absorb the cost of the levy increase

The Department for Work and Pensions’ consultation on increasing the general levy has closed. Holly Roach looks at the industry’s response to its proposals

In October, the Department for Work and Pensions (DWP) published a consultation proposing increases to the general levy on occupational and personal pension schemes from 1 April 2020.

In the consultation, which closed on 29 November, the department said the proposed rise comes as the levy's cumulative surplus had drastically reduced to just over £2m by the end of last year from £24m in 2013.

By the end of this year, the government said it expects a £16m deficit, which is estimated to surge to over £50m by 2020.

The consultation paper proposes four options to increase the levy, which include a holding increase of 10% of 2019/2020 rates with further increases from April 2021; a phased increase over three years; a phased increase over ten years commencing 1 April 2020; and a phased increase over ten years commencing 1 April 2021.

The levy - which is due every April - is in place to cover the cost of running The Pensions Regulator (TPR), The Pensions Ombudsman, and part of the activities of the Money and Pensions Service.

The DWP explained the consultation is to address the immediate requirement to adjust the levy to meet the funding requirements of the bodies it supports.

But would increasing the general levy be an appropriate way to combat the shrinking cumulative surplus and potential deficit surge?

Responses to the consultation paper suggest there are generally negative views on hiking the levy.

In official responses seen by PP, criticism for the rise is noted by a number of schemes including Now Pensions and Smart Pension.

Now Pensions argues against the DWP's proposals noting that because it is yet to recoup a number of investments as well as setting aside a large amount of capital by way of financial reserves for master trust authorisation this year, "it would not be logical for the scheme to simply absorb the levy increase".

Barnett Waddingham associate Tyron Potts adds: "For a handful of schemes, the proposed general levy hikes could represent a material increase in cash outflow for which they will need time to prepare. This is why a phased or delayed increase is preferable."

‘Ill-considered'

Smart Pension director of policy and communication Darren Philp says the consultation is "ill-considered", adding: "While we appreciate that the costs of regulatory activity are rising as these bodies are being asked to do more, the DWP's proposals to plug a short-term funding gap are unacceptable, unfair and disproportionate."

Now Pensions agrees it is "very concerned" by the proposals. The firm says: "We believe that the levy cost falls very disproportionately on large auto-enrolment (AE) master trusts, which are simple and provide modest benefits to members compared to other schemes - such as failing defined benefit schemes - that cause work for the bodies funded by the general levy."

Philp adds: "The proposals in effect amount to a regressive tax on AE schemes that are typically serving low-income individuals."

While hiking the general levy is not favoured by many schemes, the option of a holding increase of 10% is the preferred route by most, should the levy be increased.

The Society of Pension Professionals (SPP) suggests this option is most viable, noting a 10% holding increase is "acceptable, especially given the low rate of inflation".

Now Pensions shares a preference for this option revealing it is keen to avoid large or sudden increases in the levy "that could require us to formulate a revised business plan and submit it to TPR for approval".

But it proposes that rather than introducing a holding increase of 10% of 2019/20 rates, the DWP should introduce a holding increase of 1.7% instead - which is the current rate of inflation according to the government's preferred Consumer Prices Index measure.

However, Smart Pension's response argues that "none of the options presented by the DWP are palatable", and says it does not favour any of the DWP's suggestions as none of them are "particularly attractive, nor are they fair or equitable".

Wider review vital

Philp says: "The DWP needs to stop, think and listen and go back to the drawing board and consider fundamental reform of the levy so bills are more in line with the actual costs of regulating the different types of pension schemes.

"It is a nonsense that we now have a situation where members with small pots who are making minimum contributions are cross subsidising those with larger pensions."

The SPP also suggests that the structure of the levy should be reviewed, noting: "We agree the government should consider longer-term options for changing the structure of the levy, particularly the practicability of moving away from a structure based purely on member numbers."

"Under the current structure there is an implicit cross subsidy from schemes in respect of which the functions funded by the levy may be less relevant in favour of schemes where they may be more relevant," it adds.

Barnett Waddingham's Potts says: "Regardless of the absolute size of these levies, pension schemes deserve to know whether they are getting value for money from the services they are subsidising and this can only come about via a full consultation and independent review.

"Such a review will enable the industry to consider whether the proportion of costs being met by pension arrangements is fair, or whether it may be appropriate for more of the costs to instead be funded from government tax revenue."

The Pensions and Lifetime Savings Association also argues that the proposals "cause significant concern", and notes there is a "risk that the increased levy as proposed would create a disproportionate effect on some types of scheme".

Director of policy and research Nigel Peaple suggests: "The most appropriate way forward now is to freeze the levy at current levels until such time as a full and thorough structural review of the general levy can be conducted to ensure schemes are not hit by unfair or sharply rising costs."

Also supporting a wider review is Smart Pension. The firm says in its response: "We believe that there should be no increase in the levy until 1) the DWP fundamentally reviews and justifies the expenditure of its arms length bodies funded by the levy; and 2) undertakes a full levy review to ensure schemes are broadly contributing fairly to the costs of regulation and cross subsidies between different types of pension scheme are minimised."

Now Pensions also welcomes a wider review of levy payments and suggests large AE master trusts should be moved to the same column in the levy table as personal and stakeholder pensions "as we believe we are very similar to such schemes".

Levy structure

In terms of the levy formula, Smart Pension's response argues "it is now plainly apparent that the current structure is out of date, manifestly unfair and not fit for purpose".

Now Pensions agrees the structure needs reworking and recommends an immediate further tier in the levy structure is created for schemes with more than one million members and says its "understanding of the legislation surrounding the general levy is that this would be a simple change for the DWP to make".

It also supports the concept that the levy is collected on a per member basis rather than moving it to an assets or liabilities basis because it "moves in a predictable and reasonably controllable manner over the course of our business plan" and a "per member levy is consistent with how we charge our members who all pay an administration fee of £1.50 per month".

The SPP agrees a review of the levy should be considered and that it "should include, or be preceded by, consideration of any policy aims, which should underlie it, beyond raising revenue for the bodies which it funds". It adds: "A review should include an examination of the minimum operational requirements of the funded bodies."

Additionally, the SPP suggests the proposed increases for small schemes with two to 11 members "are reasonable" but say consideration should be given as to whether these small schemes "should be in the regulatory scope bearing in mind that many members of such schemes are also trustees of their scheme".

Potts adds: "Most occupational pension schemes have paid little attention to the general levy in the past because the charges are small relative to their other running costs. However, this should not be used to justify a shortened consultation period or for not conducting a formal costing review."

Despite the industry's relatively negative official responses to the consultation, a previous PP survey revealed industry views are mixed on the proposals to increase the levy, with 55% arguing against, 25% agreeing, and the remaining respondents unsure.

Of those who did not agree with the government department's plans, many questioned where the money would come from. One said: "Sponsors and schemes are not cash cows and there has to be a reality-check. It is time to challenge the DWP."

But one who agreed with the proposals said: "Given the increases in activity, this is only to be expected."

Proposed options to increase the general levy

Option 1) Holding increase of 10% of 2019/2020 rates on 1 April 2020, with further increases from April 2021 informed by a wider review of the levy

Option 2) Phased increase in the levy over the three years commencing 1 April 2020

Option 3) Phased increase in the levy over approximately ten years commencing 1 April 2020

Option 4) Phased increase in the levy over approximately ten years commencing 1 April 2021

Key points

At a glance:

  • The industry is generally negative about the proposals to increase the levy, with experts saying it is ‘ill-considered’ and ‘concerning’
  • Some industry members have said a wider review of the levy structure is crucial
  • Concern was also raised over whether schemes can actually absorb the cost of the levy increase

More on Defined Benefit

Michael Bromwich is a professor at LSE

Do USS employers really bear an extra £1.3bn every year?

Michael Bromwich explores UUK’s arguments about increased sponsor costs for USS

Michael Bromwich
clock 26 January 2022 • 9 min read
August date sealed for CDC authorisation applications

August date sealed for CDC authorisation applications

Date comes as TPR opens a consultation into authorisation procedures

Hope William-Smith
clock 25 January 2022 • 2 min read
The city of Birmingham

PIC invests £128m in low-carbon student acomodation

The secured debt investment will transform a 1,230-room Birmingham uni student village

Hope William-Smith
clock 25 January 2022 • 1 min read
Trustpilot