Govt launches consultation on restructuring pension schemes' general levy

The government has launched a consultation on the options to increase the general levy on occupational and personal pension schemes, including plans to restructure the levy.

The consultation, which closes on 27 January 2021, has outlined three potential options, including increasing the rates but introducing separate levy rates for defined benefit (DB), defined contribution (DC), master trust and personal pension schemes.

It argued that this would allow for a more extensive realignment to recognise that the supervisory regime directs more operational effort towards some scheme types than others.

The government said it was attracted to this option, noting that it would better reflect the differing levels of supervisory attention and would provide scope for subsequent realignments, whilst also preserving the collective approach that underpins the levy system.

It also acknowledged that pension schemes have been operating in an environment of “considerable uncertainty and unpredictability” amid the pandemic, and has therefore proposed only “moderate increases” in the levy for 2021/22 under this option.

In particular, it proposed an increase of 10 per cent for DB and DC schemes other than master trusts, and 5 per cent for master trusts and personal pension schemes.

The consultation stated that these increases would begin balancing the levy without imposing an “unreasonable burden” on schemes, predicting that if levy rates were to remain unchanged, there would be a deficit of around £230m at the end of 2023/24.

Furthermore, whilst the government is proposing higher increase for 2022/23 and 2023/24, it stated that bringing forward new levy rates for a three-year period should provide schemes with a firm basis on which to plan for payment.

Considering this, the government has said it will aim to set the levy rates for forward periods of three years in future, which would allow for more robust payment planning for schemes, and would align with the corporate planning cycles operated by the levy-funded bodies.

The consultation's section option suggested increasing rates and introducing a separate, lower set of levy rates for master trusts, although it stated that the government is not attracted to this option because it does not reflect the relative complexity of DB schemes.

The government estimated that option one would raise £60.7m in additional levy revenue and option two would raise £58.4m.

Its third option proposed maintaining the existing levy structure and increase rates.

However, it emphasised that this would mean failing to act on the representations received following the 2019 consultation, namely that the structure should be made more equitable and cross subsidies addressed, and that government is therefore not attracted to this option.

Commenting on the proposals, Pensions Minister, Guy Opperman, stated: "Changes within the pensions industry and regulatory landscape have resulted in growing responsibilities for the DWP’s pensions bodies, putting additional pressure on their expenditure.

"Whilst the government has protected the industry from increases in the levy over a number of years, we can no longer avoid the fact that action is needed to bring levy rates back into balance with expenditure."

Smart director of policy and comms, Darren Philp, added: "While it is disappointing that levy rates are increasing during the current economic climate, it is welcome that the DWP has listened to feedback and is proposing a fairer distribution of levy financing, recognising the different regulatory efforts involved.

“This realignment is important given that, under the current system, auto-enrolment master trusts would be financing an increasing proportion of the levy, cross subsidising the regulation of other types of schemes."

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