I am writing in a personal capacity as a Scheme Actuary with over 45 years’ experience of pension work.
My experience has been almost totally geared towards smaller pension schemes with between 2 and 500 members and, over the years, has covered advice on funding, investment, administration, finance, governance and consultancy. I have also acted, through Atkin Trustees Limited, as chair of trustees on a considerable number of schemes.
My work has been predominantly in relation to DB schemes although I have had significant involvement with trust based DC schemes and hybrid schemes.
I have set out below my comments on the review of the Occupational and Person Pensions (General Levy) Regulations 2023.
It is clear that that there is a strong case for increasing the General Levy and the proposals are noted. All three options involve increases to the per member rates and this seems the best way to balance the books. If this is accepted then only options 2 and 3 need to be considered. Option 3 involves increases to the member rates but also an additional levy on smaller schemes. It appears that this addition is intended to act as a stick to encourage smaller schemes to consolidate.
There is a strong case for consolidation of DC schemes. In these schemes, the member outcome (for given contributions) is worsened where the process is inefficient. Consolidation that offers the benefits of lower costs, improved governance and greater investments choice ought to be the way forward and should be encouraged.
Most trustee and scheme sponsors operating DC schemes recognise this and are, I suspect keen to pursue consolidation. However, this is hindered by the complexity of the process. Difficulties in finding consolidators for really small DC scheme, the need to get financial advice and the high relative costs involved in transferring small amounts across to new arrangements all make consolidation a fraught process and it, I believe, delaying the consolidation process. A £10,000 additional levy on smaller schemes would concentrate the mind but should only be contemplated if the whole consolidation process is simplified. Simplification should be a first priority and would I believe lead to rapid consolidation of most small DC schemes. Provided that there is a ready process that DC schemes can use to consolidate then the additional fee might be justified but simplification ought to come first.
Hybrid schemes where benefits are the higher of DB and DC face particularly knotty problems due to the inter-connection of DB and DC benefits. These schemes are perhaps best considered under the DB umbrella (see below). As a side issue, further work ought perhaps to be initiated to try to resolve and alleviate the particular problems faced by schemes providing the better of DB and DC benefits.
Investment regulated pension schemes are a special case and ought not to be subject to an additional £10,000 per annum levy. This would be wholly inequitable and adverse consequences for smaller owner managed firms.
The notion that there is some intrinsic benefit in the consolidation of DB schemes need to be scotched. I have seen too many cases for comfort where consolidation has stultified and impersonalised day to day operations and have all too often led to systems becoming inflexible and inefficient with issues being difficult to resolve.
In my experience, the majority of sponsors would love to see their pension scheme off their balance sheet. Often there is no longer any connection whatsoever between the current sponsor and any of the members (other than through a pension scheme that may have closed many years ago).
Recent rises in gilt yields have put many schemes that previously had large deficits (and buy-out of benefit was a distant dream) into a situation where the sponsors can afford to wind-up the scheme at little or no cost. Many of these schemes are actively pursuing potential buy-ins or buy-outs. However, the capacity of insurers to absorb the demand and their ability to process prospective new cases, is limited. In these cases, there is really no need to impose a threat of an imminent swingeing annual levy. This would merely put greater pressure on all involved to the detriment of all and would seem wholly inequitable.
Consolidators perhaps have a place but are unlikely to be fully functioning for some time yet. In any case, it is debatable whether they have a role in schemes where there are sufficient resources to wind-up the scheme without significant support from the sponsor.
As an aside again, consideration ought to be given to a government-backed consolidator (perhaps a PPF Mark II providing full rather than reduced benefits). One of the most tricky problems in the buy-out market is the overwhelming variety of different terms and conditions applicable under different schemes. Consideration ought to be given to the introduction of a simple process to allow benefits to be converted to a simple one size fits all basis so that consolidation whether through insurance companies, consolidators or a PPF Mark II can be eased. If all this is in place then the notion of penalizing schemes that remain out of line might then be considered but not before.
Other DB schemes are less well funded. Ironically many of these schemes are those that followed the ‘party line’ and adopted a LDI approach before September last year. For these schemes the current regime (other than perhaps the obsession with LDI) works satisfactorily and it is difficult to see how consolidation would help. By following an LDI strategy, these schemes adopted a medium to long term strategy with the aim of gradually moving to full funding. They need time and space to achieve their end game. Applying a £10,000 annual penalty to such schemes would be inequitable, unjustifiable and ironically might be counter-productive in achieving the aim of better member outcomes. Member outcomes in a DB scheme are governed primarily by the strength of the sponsor. The additional levy would put greater financial pressure on sponsors (since they ultimately meet the cost of the levy) making it more likely that members will not get the full benefits. The £10,000 would , in these cases, be better directed towards improving the funding.
Finally to answer the specific questions in the consultation paper
Question 1 Which option do you prefer?
Question 2 In respect of your answer to Question 1, why do you support your preferred option?
The additional £10,000 levy would be inequitable and, in the case of DB schemes could lead to worsening member outcomes. Option 3 would be seen to be grossly unfair and should not even be countenanced.
Question 3 What is the impact on your scheme/business of raising the levy under Option 2?
My clients would obviously prefer not to pay an increased General Levy but would accept that it is perhaps unavoidable. Option 2 results in a small increase in costs so would have minimal impact.
Question 4 What is the impact on your scheme/business of raising the levy under Option 3?
The significant increase in cost would be seen as grossly unfair and might in some cases be unmanageable leading to an adverse impact of the business and worse member outcomes.
Carve out required for investment regulated pension schemes.
Question 5 How will your scheme respond to a levy increase and/or premium? (For example: would it be absorbed by the scheme, passed on to members, or employers?)
It would be difficult to see how a massive levy on a small DC scheme would be absorbed unless the costs are passed on to members under the rules of the scheme. The levy would hit sponsors of DC schemes and would encourage consolidation of small DC schemes.
For DB schemes the employer would have, at the end of the day, to meet the increase. Outcome – potential worse member benefits and significant employer resentment at unfair treatment.
Question 6 If you were to consider passing on costs to employers to absorb the levy increase, what is the size composition of employers using your scheme? (For example: are they mainly small, with less than 50 employees or larger employers?)