DWP consults on plans to raise Fraud Compensation Levy ceiling

The Department for Work and Pensions (DWP) has launched a consultation on plans to increase the Fraud Compensation Levy (FCL) ceiling for the levy year 2022/23 onwards.

Under the proposed changes, the FCL ceiling would allow levy rates to be set by the Pension Protection Fund (PPF) to a maximum of 65 pence per member for master trusts and £1.80 per member for other eligible occupational schemes.

Earlier this year, the PPF increased the 2021/22 FCL on pension schemes to 30 pence per member for master trusts and 75 pence per member of other schemes, the maximum level allowed under current regulations, in light of a High Court ruling that found occupational pension schemes set up as part of a scam were eligible to claim on the Fraud Compensation Fund (FCF).

The PPF has already seen some claims on the fund following the ruling, estimating that claims could potentially total up to £350m, which exceeds the assets held within the FCF.

In light of this, the PPF has been agreeing a loan from Treasury through the Compensation (London Capital & Finance plc and Fraud Compensation Fund) Act 2021, which received Royal Assent on 20 October 2021.

The proposed changes in the consultation would therefore allow the FCL rates to be reset at levels that would enable this loan to be repaid by 2030/31, with the hope that this will strike an "appropriate balance" between recovery over a period that is not unduly lengthy and limiting the impact on pension schemes.

The government clarified that it is not consulting on preserving the current levy as it does not consider this to be a realistic option, noting that setting the levy in line with the current ceiling would delay the repayment of the loan until approximately the 2040s.

Indeed, the DWP estimated that if FCL rates were to remain unchanged, the FCF would be in a deficit position exceeding £250m by 2025.

However, the government has included information about the current position in the impacts section to facilitate a baseline comparison with its proposal.

This showed that the proposed changes would bring in an additional £12.5m from occupational defined benefit and hybrid schemes in 2022/23, alongside an additional £1.8m from occupational DC and £6.9m from authorised master trusts.

Commenting on the consultation, Smart Pension director of policy, Darren Philp, said: "While it is only right that victims of pension scams that are eligible to claim under the FCF are able to do so, hammering auto-enrolment savers and providers by funding the deficit on a per member basis is unjustified, inequitable, and unfair.

"It beggars belief that the government thinks it is equitable that savers in auto-enrolment master trusts, often contributing minimum contributions, and with the smallest pots, should be disproportionately paying for the costs of this type of fraud, even with a lower per member cap, when compared to the assets under management in other types of schemes.

"We think the government needs to review the FCF and the levy underpinning it as a matter of urgency".

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