DWP to retain general levy structure but increase rates by 6.5% a year

The Department for Work and Pensions (DWP) has decided to retain the current general levy structure and increase rates by 6.5 per cent for all schemes.

In its consultation response, the DWP revealed that it would proceed with ‘option two’, which the majority of respondents chose as the preferred way forward.

The DWP noted that this option would bring the cumulative deficit back into a ‘compliant level’ by 2031.

Option one would have continued with the current levy rates and structure, while option three, which was initiallyDWP's preferred option, would increase rates by 4 per cent a year with a premium added to defined contribution (DC) schemes with memberships under 10,000.

Only four respondents preferred option one and just three chose option three, with 278 respondents preferring option two.

The DWP noted that many of those choosing option two commented that option one would not have been viable as it would negatively impact the general levy deficit, while concerns about the affordability of option three for smaller schemes were raised.

These issues were previously raised by industry figures after the consultation was initially published.

The regulations (The Occupational and Personal Pension Schemes (General Levy) (Amendment) Regulations 2024), which amend the 2005 Regulations to reflect the government response, have been made and laid before both houses of parliament.

Commenting on the consultation response, LCP pensions research team principal, Tim Box, said: “We are pleased that the government has changed its position on how to raise the general levy in the future and has decided to go with the middle-ground option of 6.5 per cent pa increase for all schemes – the consultation response shows that 97 per cent of respondents preferred this.

“We agreed with the government that keeping rates at the same levels would not deal with the general levy deficit but we are relieved that the government has decided not to pursue what was its’ preferred option in November 2023 of increasing rates by 4 per cent pa but also adding an additional premium of £10,000 for ‘small’ DC schemes with membership under 10,000.

“That approach would have had a devastating effect on many pension schemes and could have seen consequential increased costs for members.”

Association of Member-directed Pension Schemes chair, Andrew Phipps, added: “The government response to their consultation on the general levy has been published today.

“It is great to see that a proportionate approach has been taken and the £10,000 premium many feared would be levied against small schemes has been avoided.

“A fantastic response from the industry with 287 responses, clearly having the desired effect, and thanks to the DWP for listening.”