PensionsNov 2 2021

Pension schemes face fraud compensation levy hike

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Pension schemes face fraud compensation levy hike
Credit: Fotoeye75

The Department for Work and Pensions is consulting on changes to the fraud compensation levy, which will see pension schemes pay more than double the current fee as pension scam-related claims rise.

In a consultation published yesterday (November 1), the DWP proposed to raise the levy that funds the Fraud Compensation Fund, managed by the Pension Protection Fund, from the current charge of 75p to £1.80 per member for pension schemes, and from 30p to 65p for master trusts.

This was after a court case clarified the rules around who is eligible to make a claim, leading to more claims coming forward. 

The FCF, set up in 2004, is designed to compensate pension schemes that suffered losses as a result of dishonesty. 

But in its 16-year history, the FCF has only compensated 10 schemes to a value of £5m due to issues around who can bring a claim. 

In November 2020 the PPF and Dalriada sought clarity from the High Court, which ruled that any occupational scheme liable to pay the FCF levy could qualify for compensation in the event of fraud.

Following this, nine claims totalling £40m were received, but the PPF is “aware of” an additional 117 possible claims with a potential value in excess of £358m - but the FCF only has assets totalling £33.9m.

In April 2021, the FCF levy was raised to the maximum allowed by law of 75p per member and 30p for master trust members.

However, the PPF noted in its annual report that “this levy alone would not be sufficient to fund all potential claims" and said it had asked the DWP for a loan to cover the cost. 

The DWP is now consulting on an uprate to the fraud compensation levy so the loan can be repaid by 2030-31.

The loan is expected to cover 122 schemes and amounts to approximately £250m over the period from 2021 to 2025, the DWP stated.

If no changes were made to the levy, the loan “would not be recovered in full until approximately the 2040s”, it added.

“The government does not believe that preserving the current levy ceiling is a realistic option and so it is not consulting on such a possibility.”

DWP rebuffs changes to levy structure

There have been suggestions the levy should be restructured, so it is no longer based on the number of members, which is of disadvantage to master trusts with large numbers of members, or small pots, or both.

But the DWP said due to the current structure with a “substantially lower levy” for master trusts, “there are no plans to alter this arrangement, which is expected to mean that the fraud compensation levy burden to be absorbed by master trusts is substantially lower than the burden to be absorbed by most other schemes”.

David Brooks, technical director at Broadstone, noted the proposed increase will make the “FCF levy a more significant expense for pension schemes".

"However, it is a difficult one to balance. As usual, and as we see with the Financial Services Compensation Scheme in the advisory market, it is the remaining pension schemes that compensate for the loss caused by the immoral and corrupt that commit pension fraud in the first place,” he said.

“While hard to take, I think it is through this prism that we should see this increase. Previously it has been very difficult for those that lose their pension savings to get compensation. The ruling last year that allowed schemes to claim through the FCF is another important route for those victims.

“One hopes that greater awareness of scams and their methods will make future increases unlikely, but with the size and scope of scams not entirely clear to any of us, we may need to prepare for future rises, if not a complete rethink of the model.”

The DWP said: “The government believes that the fraud compensation levy and FCF continue to work broadly as intended.”

maria.espadinha@ft.com