The Levy that broke the camel’s back

The General Levy – who would have thought something so mundane would have my inbox on fire with people voicing their concerns about the Government’s proposals?

Before we get into the proposal, what is the General Levy? The General Levy exists to pay for costs of the Pensions Ombudsman, the Money and Pensions Service (MaPS) and the Pensions Regulator (TPR). This is separate from other levies schemes pay such as the PPF levy (which I’ll come on to) and the PPF Administration Levy, which is currently zero thanks to the well-funded position of the PPF.

A shortfall in funding of approaching £200m is accumulating and the Government is keen to address this issue. It has issued a consultation to recover the position by increasing the current levy. The levy is currently based on a per member charge, which is higher for smaller schemes (so £2.29 per member for a DB scheme with between 100 – 999 members and £0.72 for a DB scheme with half a million or more members), subject to a minimum fee. The fees are also split by scheme type: defined benefit (DB), defined contribution (DC), Master Trusts and Personal Pensions.

It’s no great surprise that we’re seeing increasing regulatory costs – the regulatory framework is complex with a lot of TPR’s time dealing with auto-enrolment compliance, VFM monitoring, pension dashboards, DB scheme risk reduction following the interest rate rises etc. The Pensions Ombudsman is also focussing more and more on scam reduction with the launch of the dishonesty unit.  There is a question however, as to whether the proposals put forward to pay for this make any sense…

We are given 3 options in the consultation, with the Government saving their favoured option for last.

Option 1 – Stay as we are and accept that there will be a shortfall (feels like an obvious non-starter).

Option 2 – increase all levy rates by 6.5% pa until the shortfall is paid off by 2030/31 and keep the same structure split across scheme types (it’s a fairly steep increase and the DB sector ends up bearing the majority of the additional cost).

Option 3 – increase all levy rates by 4% pa plus a £10,000 minimum premium from 2026/2027 levy year.

The rationale offered for option 3 is that it fits with the overall policy intention for dramatic consolidation across the pensions universe, the objective being to have fewer schemes to regulate and these would be well-run with suitably sophisticated (and ‘productive’) investment strategies.

Before we get onto the viability of reaching such a position in the next three years (and their figures are based on a sudden and massive shift in the landscape within that period), let’s consider how option 3 would impact some fairly typical DB clients of ours:

MembersLevy nowLevy from 2026Increase percentage
78£494.52£10,556.142,130% or 21 times


Pretty eye-watering, with the aim apparently to incentivise schemes to start consolidating more quickly.  For DC schemes the increases are even higher and whilst this may well be something smaller DC schemes are working on, some will simply ignore it and others may not move fast enough.  Ultimately, it is highly likely this cost will be passed through to members – perhaps without warning –denting individual DC savings and making VFM challenging.

In the DB space the position is even worse.  For smaller DB schemes in a congested market it will be very difficult if not impossible for many of them to buy-out or consolidate in this accelerated timescale.

We must also consider how many schemes would be impacted by this. According to the Purple Book 2022, out of 5,131 DB schemes as at 31 March 2022 4,949 have less than 10,000 members (more than 95% of schemes).  This hardly therefore seems targeted at the smallest schemes who are not delivering to TPR’s governance expectations.  Over 90% of DB schemes had less than 5,000 members so even halving the cut-off doesn’t move the dial much.

It is only when you consider these sort of figures that the suggestion within the proposal that 50% of the affected schemes will use this as motivation to consolidate within the next three years really comes into focus. The consultation estimates a £100m windfall from this £10,000 pension scheme existence penalty but it could easily be £150m or more, generating a huge windfall for the DWP. And remember, this penalty would apply whether you’re a good scheme or a bad scheme. Whether you provide value for members or not. Regardless of whether you’re unable to buy-out or consolidate.

This windfall seems disproportionate to the size of the problem and something closer to £2,000 per annum, on a more focused selection of schemes, whilst still far from perfect, could be considered to achieve something like the aim.   It would still attract the attention of (and be non-negligible to) micro schemes and also address how the figures might add up longer term.

By proposing this massive regulatory hike, questions may be asked of what direct and practical steps TPR and others have been taking to help regulate the smaller schemes that are now being hit with gigantic charges. What about schemes that are well regulated and do the right things? The Government’s policy aim of accelerated consolidation to create a simpler and more easily regulated universe is all well and good but would punishing schemes in this disproportionate way be fair and reasonable?  Ultimately it is members who will suffer as funds are diverted to pay for this, and it seems likely to be those members of poorly run schemes who will suffer most as they are likely to be slower to consolidate.

Finally, you may recall I promised a comment on the PPF Levy. It is estimated that 99% of schemes will see a lower levy in 2024/25 as the PPF is in such rude health. However, if not for legislation tying the PPF’s hands it could have been lower and even zero. We are joining with businesses and figures from across the industry in lobbying for a pragmatic fix to this issue to avoid employers being asked to provide a cumulative £100m p.a. of additional funding to an organisation that admits it doesn’t really need it.

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