PensionsDec 10 2019

The new pensions levy is deeply unfair

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Most of us spent our childhoods being conditioned to the reality that life is not fair.

However, that does not make it any easier to digest when confronted with a situation that requires us to make our disquiet known.

Plenty within the industry are allowing their voices to be heard in regards to the current situation surrounding the General Levy – the mechanism through which the Department for Work and Pensions extracts funding for The Pensions Regulator (TPR), the Money and Pensions Service (MaPS) and The Pensions Ombudsman (TPO).

What causes consternation is the sheer size of the levy hikes mooted by government

Last month the government closed its consultation on raising the general levy and to say that this concerns the PLSA Master Trust Committee would be something of an understatement.

Even before we see an increase, the 10 master trust pension schemes that form the committee – including The People’s Pension – are, liable for a quarter of the overall bill, despite only holding around 2 per cent of the occupational pension sector’s assets.

No-one disputes the importance  of the levy – it is in everyone’s interests that the sector is well regulated – what causes consternation is the sheer size of the hikes mooted by government, and the unfair way the burden is shared currently across the industry.

Currently, the levy is paid on a per member basis, rather than a scheme assets basis, meaning that master trusts schemes delivering government policy on auto-enrolment (mass membership, small pots) make by far the biggest payments, with the gap just increasing as the number of small pots continues to proliferate in line with government AE policy. 

The People’s Pension, with  4.7m members will, by 2020-21 be paying £2.9m, towards the General Levy in 2020-21, 7 per cent of the total levy raised. 

USS the biggest scheme in the country by assets will, on the same calculation, pay £390,000.

We mean no criticism of USS but with assets of more than £60bn, it dwarfs the £8bn assets of members of The People’s Pension, and it is hard to see how the government justifies an auto-enrolment master trust paying 700 per cent more than the nation’s blue chip DB scheme.

This is before one considers how the costs of regulation – what the levy actually funds - are broken down between different pensions sectors.

The rapid deterioration in the levy’s funding position – from significant surplus to deficit almost overnight, according to the government consultation paper – demands explanation.

What explains the rising regulatory costs?

Auto-enrolment employer staging was a huge one-off regulatory cost but it has now ended – does its culmination not offer cost savings?   

To answer these legitimate questions there needs to be greater transparency from government about where the costs of regulation fall, sector by sector, across DB, and DC, and auto-enrolment.

We believe a well-designed levy should do three things:

  • Provide a stable revenue stream for MaPS, TPO and TPR
  • Place limits on cross subsidy; cross subsidy is an inevitable feature of levies and is in some cases desirable, but it should be limited. The costs of “greater good” regulation should not fall disproportionately on any one group of levy payers and schemes should generally fund the regulation of the benefits they offer.
  • Be consistent with government policy for the pensions market. It should not focus on any one market sector or create perverse commercial incentives.

None of this will be a quick fix – meaningful change takes time and always requires consensus.

The time has come for the government and the pensions sector to talk frankly and constructively about a fair, sustainable way of delivering the General Levy across the long-term.

Gregg McClymont is director of policy at The People’s Pension