Master trusts will be hit twice by a general levy increase, as in addition to a cost hike these schemes will also have to boost their reserves in case of a wind-up.
In a consultation published in October, the department for Work and Pensions stated the general levy would need to rise to plug an estimated gap of £540m by 2029/30 under current rates.
This levy, which was last increased in 2008/09, recovers the funding provided by the department for the core activities of the Pensions Regulator, the Pensions Ombudsman and part of the activities of the Money and Pensions Service.
Besides an increase in costs – analysis from The People’s Pension shows that 10 master trusts will pay at least 25 per cent of the total general levy, despite only holding two per cent of assets – there are other particularities of this sector that mean there will be added consequences for the schemes.
Since the new master trust regulations came into force, these schemes have been required to hold reserves to facilitate an orderly wind-up to cover the cost of running the pension fund for two years while members are moved elsewhere.
This was one of the requirements introduced by the government when designing the new authorisation process led by TPR.
Darren Philp, director of policy and communications at Smart Pension, explained if the levy is increased, the reserve requirements that master trusts have to hold will also need to rise.
“In a way, we could argue that we are getting hit twice. We are getting hit by an increase in the levy, which is sort of universal, but we also have to place a corresponding amount in a reserve fund that we cannot use,” he said.
“The higher the levy, the more the scheme will have to hold in terms of capital to meet that winding up period.”
Mr Philp added: “With everything else being equal, if a levy bill was £4m, a 10 per cent increase would be £400,000, so the reserves would have to increase by this figure.”
The government proposed four options to increase the levy, favouring the first option, which would see a rise of 10 per cent in 2019/20 rates on April 1 2020, with further increases from April 2021 informed by a wider review of the fee.
Other options included a phased increase over three years of 45, 125 and 245 per cent, respectively, or over 10 years starting in 2020 or 2021.
Adrian Boulding, director of policy at Now Pensions, noted that a hike in the levy could result in master trusts having to submit a revised business plan to TPR.
He said: “In our particular case, we charge £1.50 a month, so £18 a year, and we pay 65p a year for the general levy, and then another 20p a year for the fraud levy. So, 5 per cent of our revenue is going straight out to the government as levies.
“The consultation paper includes suggestions that the levy might need to rise by more than 200 per cent, which is a threefold increase.