The Department for Work and Pensions (DWP) has launched a consultation seeking views on further proposed changes to the general levy on occupational and personal pension schemes.
Their excellent press release tells you what you need to know about the levy and the Government’s proposals. I’ve included it at the bottom of the blog.
I have five thoughts to share
- Despite appearing even-handed by offering three choices, the preferred choice is clearly to hit “small schemes” with an additional £10k pa levy (options one and two simply don’t stack up financially). “Small”, in this context, is a scheme with less than 10,000 members – that’s all but a few hundred occupational schemes. This is a consolidation tax.
- The revenue table below shows that £10k levy will become payable from 26/27 giving smaller schemes a three year period of grace. There’s a three year consolidation window.
- The additional fee assumes minimal consolidation, if consolidation occurs and there are no more small schemes in 2026, it is TPR, MaPS and PSO will have to reverse their current “scope creep”
- Until the Government solves the small pots problem, the bulk of levy revenues will increase naturally by the exponential increase in deferred pension pots, the workplace pension providers are being told to implement small pot consolidation or die.
- By far and away the biggest small pot problem is with Nest, Nest owes the DWP money and these proposals suggest that it will not break even, or repay its debt – until it gets its act together on small pots.
This levy consultation is a wake up call to the workplace pension providers and to trustees of small occupational schemes. I don’t think it impacts GPPs to the same degree as they are seen as collective entities – not a number of employer schemes. But the massive increase proposed in 2025 looks a more effective spur to prick the intent of consolidation, than the VFM framework. If TPR gets scheme numbers down into the hundreds, we should expect a meaningful reduction in regulatory costs.
The DWP is issuing a financial ultimatum to workplace pensions that unless they consolidate at both the scheme and pot level, they will die.
What is the General Levy and what are the Government’s proposals.
The general levy funds The Pensions Regulator (TPR), the Pensions Ombudsman (TPO), and the pensions-related activities of the Money and Pensions Service (Maps), all three of which receive grant-in-aid from the DWP, which is reimbursed by income from the levy.
The DWP said this consultation aims to raise awareness of the ongoing deficit in levy funding and sets out options for mitigating this over the next three tax years from 2024 to 2025 through to 2026 to 2027 – seeking the industry’s views on the three options previously agreed by ministers.
It said, without reform, the cumulative deficit would continue to grow – rising to £205m in 2030-2031 as expenditure outstrips levy revenue.
The DWP said the need for further reform and increases in the levy was due to the increasing span of activities carried out by TPR, TPO and Maps to support government objectives.
It explained: “The government remains committed to improved member education, proactive regulation and strong protections for scheme member benefits. Ongoing action to bring costs and revenue back into balance is now inescapable and is an appropriate and reasonable response to the levy deficit.”
The three options set out by the DWP are:
Option 1: Continue with the current levy rates and levy structure
The DWP said this option would freeze rates at this year’s rates until the 2026-2027 tax year and retain the four categories of rate payer:
- defined benefit (DB) schemes
- defined contribution (DC) schemes other than master trusts
- master trusts
- personal pensions schemes
It said this option would see the cumulative levy deficit continue to grow, rising to £205m in 2030-2031 as expenditure outstrips levy revenue – adding this would mean greater rises would be needed at a later date.
Option 2: Retain the current levy structure and increase rates by 6.5% per year
This option allows for the current structure of the levy to be retained while increasing rates for all schemes at 6.5% per year.
The DWP said this option would bring the cumulative deficit back into a compliant level by 2031.
Option 3: Increase rates by 4% per year and signal an additional premium rate for small schemes (with memberships up to 10,000) from 2026
The DWP said this option increases rates by 4% per year across all schemes and will add a premium to schemes which as of April 2026 have memberships under 10,000.
It explained this premium allows for a lower initial increase across all schemes, while still paying off the deficit, and supporting the consolidation of smaller schemes.
Revenue collected under different options