UK Pensions Headlines: October 2023

WTW comment

Readers may recall that the 2020 review resulted in significant hikes to the levy, with increases being phased in over three years to 2023-24. Over this period, the levy for DB and hybrid schemes increased by between 117% and 120% (depending on the appropriate membership band for the scheme) and for non-Master Trust occupational DC schemes by between 48% and 50%.

Option 3 is designed to coerce trustees of smaller schemes to consolidate with no regard as to whether this might be in the interests of their members or indeed of the wider pensions community, as they will be obliged to pay the Additional Fee solely because of their size irrespective as to whether their governance imposes additional burdens on the regulatory regime. At first sight, this appears to run counter to the proportionality guidance from the Regulatory Policy Committee and it is difficult to see how this comprises risk-based regulation.

Table A3 of Annex C sets out the revenue forecast under Option 3

As is apparent, the £10,000 premium is projected to raise more than the ‘standard' general levy. With the projected deficit of just over £200m in 2030-31, absent any change, it would appear to be wiped out with two years' payments. However, there is no indication in the document that the Government intends this to be a temporary premium. Rather, the implication is that this would likely be the new norm; which then begs the question as to what the Government intends to do with the likely £300m surplus that it will build up by the end of 2030-31?

It also needs to be noted that the projected revenue in Table A3 is predicated on an assumption that “50% of all schemes in scope consolidate by 2026, 2023-24 to 2026-27”.

Part of the rationale for the increase is to meet increasing costs of the three entities that the levy covers – the Pensions Regulator (TPR), the Money and Pensions Service (MaPS) and the Pensions Ombudsman (TPO). Analysis of the latest sets of reports and accounts for each of these bodies shows that the number of staff is increasing. All three publish full-time employee numbers; 108.4 (2020-21) to 115.7 (2021-22) for TPO and 356.20 (2020-21) to 385.10 (2021-22) for MaPS and 470 (2021-22) to 512 (2022-23) for TPR. The figures for TPR exclude automatic enrolment compliance officers (269 in 2022-23) as these are currently exclude from the general levy.

Amongst other things, the consultation document cites “extending TPR's regulatory grip” and increasing demand for TPO's services as reasons for the increasing costs. However, given the modelling assumes that the number of schemes in scope for the Option 3 premium will halve, it raises the question as to whether such an increase is really necessary?

How the quoted revenue figures were calculated is also unclear. In-scope schemes, those with fewer than 10,000 members number 5,000 on the DB side and around 26,000 for DC (the latter based on scheme return analysis for 2022-23, albeit the data shows schemes with 5,000+ members rather than 10,000+). Assuming 50% of the sub 10,000/5,000 schemes consolidate, that would appear to give rise to an additional premium over the standard levy of £155m rather than £100m.

As well as asking which option respondents prefer and why, the Government seeks views on the ‘impact' on the scheme/business of both options 2 and 3. The penultimate question seeks views on whether the increased cost would be absorbed by the scheme, passed on to members or passed on to employers. The final question then asks about the size of the scheme sponsor “if you were to consider passing on costs to employers to absorb the levy increase”.

Perhaps when considering how to respond to this consultation, stakeholders might ask the Government to set out more clearly how it expects future resourcing numbers at the three entities to develop and whether setting a premium of £10,000 is the minimum necessary to make up the accumulated deficit. If not, what is the justification for building a surplus – particularly if the Government is successful in its campaign to halve the number of regulated schemes?