Just when it was all going so well, the pensions levy might be about to ruin the auto enrolment party

Will Wynne
Follow Will
Germany Faces Aging Population
Just when things were about to get good, the pensions levy could make things harder for smaller providers (Source: Getty)

Stop the clock: the DWP’s consultation on the pensions levy ended this morning.

So far, so boring. Well - boring but important for things like fairness, competition and the state not interfering in the private sector or distorting markets... those sorts of mundane things.

The situation:

  • The Pensions Regulator collects a flat annual “pensions levy” per pension member from pension providers (Disclosure: including from my employer, Smart Pension).

  • The money raised is used to pay for the Pensions Regulator’s very valuable activities. So far so good - Philip Green isn’t going to kick his own head in, after all.

  • However, it seems the regulator is raising more than it needs through this levy. So the government, very sensibly, plans to return this surplus. Great plan. How?

The problem:

  • The consultation lays out three ways to return the surplus cash and indicates that the favoured option is to give the money back exclusively to the biggest providers (those with over 500k members), including the already hugely government-supported government-funded provider, Nest.

  • The discount would apply to the levy on all of these providers’ existing members and any they acquire in the next 18 months (when over 1m employers must auto enrol millions of new members into schemes).

  • The recommendation appears to have been reached following behind closed doors representations from “a group of very large pension schemes”.

Skipping past the “very large pension providers recommended returning money to very large pension providers” elephant trumpeting in the corner of the room, that list of “very large schemes” wouldn’t include the government funded scheme, Nest, would it?

Paying the pensions levy is a fundamental part of offering pensions to members. It should be baked into the unit economics of all providers as it forms part of the fundamental business of pension provision.

To give an economic advantage now to the larger players, who should in any case be realising significant benefits of scale from their existing volumes, is to unfairly skew the pitch in favour of incumbents and away from healthy competition - that is bad for employers and bad for their employees.

Such action is particularly inappropriate at a time when auto enrolment has moved into the smaller, more expensive-to-service segment of “micro employers”. In additional irony, nearly all of the proposed beneficiaries of the cut have recently brought in set up fees for new employers signing up with them.

The most obvious solution would be simply to reduce the levy across the board - the bigger you are, the bigger your absolute benefit - with no advantage in unit economics to any player in the market. Failing that, put the surplus to work elsewhere (eg in further safeguarding members’ interests).

Direct help for the larger players, including Nest, feels just plain wrong and anti-competitive given it tilts the pitch even further in their favour. I hope the Select Committee will agree, reject the consultation’s recommendation and the government will opt to return the levy surplus on an equitable basis.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

Related articles