In a consultation paper published on 2 October, the Department for Work and Pensions set out three options for how general levy bills should be calculated between 2024/25 and 2027/27. The general levy part-finances functions carried out by the Pensions Regulator, the Pensions Ombudsman and the Money and Pensions Service.
The £101 million that the £10,000 additional fee is projected to raise – more than half of levy revenue in 2026/27, under this option - implies that a little over 10,000 schemes with fewer than 10,000 members would stick around and pay £10,000 apiece.
That, though, is hard to tally with DWP’s stated assumption that half of schemes in scope soldier on. TPR’s data indicates that, out of 32,145 schemes, 31,804 have fewer than 10,000 members. If half of these paid the £10,000 additional fee, it would raise around £160 million. It is also hard to see how DWP concluded that Option 3 would, like Option 2, merely clear the accumulated shortfall between levy revenues and associated spending by 2030, especially if the “additional fee” is intended to recur annually after 2026; on the assumptions used, Option 3 would appear to generate a large surplus.
For the smallest workplace DC schemes, Option 3 seemingly makes consolidation unavoidable. If a scheme used to discharge an employer’s automatic enrolment duties manages less than £1.33m of assets, the additional fee would amount to more than the 0.75% charge cap. The Government was, though, already expecting many small schemes to wind-up; those with under £100 million under management have a statutory duty under Value for Members assessments to consider whether consolidation would be in members’ interests. The Government’s aim here may be to accelerate change further up the size spectrum. Employers looking to move from an own-trust solution to a Master Trust would have 10,000 reasons to get on with it. In practice, many employers have already initiated or completed such a move with many others exploring how to do so. It’s debatable whether additional incentives are necessary.
DC consolidation will frequently be in members’ interests, and other policy initiatives in this area could be a big help in situations where that is the case – for example, the Government is looking at facilitating bulk transfers from contract-based arrangements without each member needing to consent.
However, there are cases where it is impractical and/or potentially harmful to members’ interests:
The consultation paper does not spell out that the additional fee would apply to DB schemes, but it says nothing to the contrary and comes three months after the Chancellor’s Mansion House speech asserted that the DB landscape is “too fragmented”.
96% of PPF-eligible DB schemes have fewer than 10,000 members. These schemes would need to sever their links to sponsoring employers and wind up to avoid paying it. How many will have a practical option to do that by April 2026 – even if the Government gives the green light to the PPF taking over solvent employers’ schemes, passes the necessary legislation and resolves all attendant issues around benefit standardisation and the entry price? Furthermore, if closure to accrual is a condition for entry, would the Government want to fine employers for not pulling the plug on pension schemes considered by many to be the gold standard?
The justification for raising levies in one way or another is that there is a shortfall between levy revenue and the expenditure it is meant to finance (with the shortfall recently made up by taxpayers – and the Government wanting this to be a loan rather than a gift). That’s fair enough in itself, but schemes may query whether the revenue side of the equation should take all the strain. The consultation paper reports that DWP provides an “effective challenge function” to its arms’ length bodies and maintains a “continuous dialogue” focused on value for money, and it was published on the day that the Chancellor told the Conservative Party conference how the government was “up to the challenge” of raising public sector productivity. However, there is no suggestion in the consultation document that the ledger could be balanced by spending less. Does the Pensions Regulator need to spend as much on protecting DB members’ benefits now that these schemes are so much better funded? And, as the premise of the consolidation agenda is that larger schemes are better governed, should it not leave a risk-based regulator with less to do?
Nor are these levy rises intended to be the end of the matter. A further consultation is promised on how to pass the cost of ensuring that employers comply with their duties under automatic enrolment legislation (£33m in 2022/23) to general levy payers. Reversing the policy that has applied since the introduction of automatic enrolment, the Government now argues that "the pensions industry has benefitted hugely from the inflow of AE members” and that “the sector, rather than the taxpayer, should pay for the employer compliance regime”.
Of course, not all schemes paying the general levy have been affected by automatic enrolment in the same way – some had high take-up to begin with, while others were already closed to new members. With most operating on a not-for-profit basis, any gains from greater scale should also have been passed to members – as the Government assumes will be the case when encouraging consolidation. It seems likely that the bulk of this £33 million cost will similarly be passed to members (in the form of higher DC charges than would otherwise apply) and employers (who might reimburse schemes they sponsor, especially DB schemes). The Government realistically acknowledges this when discussing its main proposals but, strangely, does not do so here.
