The Department for Work and Pensions (DWP) proposal on the General Levy will yet again target smaller schemes out for unfair treatment, according to leading independent consultancy Broadstone.
To balance the books with increasing regulatory costs, the Government needs to raise additional funding from the industry. Their preferred course of action is to increase the annual levy rate by 4% p.a. as well as introducing a £10,000 premium in April 2026 for schemes with less than 10,000 members. This premium allows for a lower initial increase across all schemes than would otherwise be required, whilst still eliminating their funding deficit by 2030/31.
The DWP stated its desire to see “fewer, larger, well-run schemes” as the reasons behind the proposals, noting that across the whole pensions industry most schemes with under 10,000 members have 2-11 members and are frequently found to have lower governance standards, knowledge of pensions and low compliance levels.
David Hamilton, Chief Actuary at Broadstone said that the proposals are indiscriminate and disproportionate financial punishment for smaller arrangements, with no clear escape route for defined benefit schemes.
He said: “The DWP's preferred direction of travel seems to set a punitive premium trap and once again small schemes look set to be hammered disproportionately by regulatory changes.
“The proposals are evidently aiming to drive consolidation at the smaller end of the DC market, but they are poorly targeted and the figures simply do not add up. It is unclear from the consultation if this is intended as just a one-off fee, but if so, it suggests there is no viable long-term plan beyond 2026/7 for the sensible management of regulatory costs. If not, then the figures quoted are completely disproportionate, and the suggestion that this could incentivise half of all small schemes to consolidate within three years seems ambitious at best.
“In the DB market there is no obvious way out for smaller schemes within these timescales. There is already a struggle to achieve competitive buy-out pricing as insurers understandably focus on larger, more profitable opportunities, and whilst consolidators might provide a longer-term solution, Clara are yet to take on one scheme, let alone hundreds or thousands.
"To impose a penal levy on these schemes on top of the additional governance costs already looming for compliance with the General Code and new, more conservative funding regulations, is completely unreasonable and out of touch with the efforts of many hard-working and diligent DB trustee boards looking to deliver the best possible solutions for their members."
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