In a consultation published on Monday, the DWP proposes to increase the levy that funds the Fraud Compensation Fund, managed by the Pension Protection Fund, from 75p to £ 1.80 per member for pension schemes, and from 30p to 65p for main trusts.
The FCF, established in 2004, was designed to compensate pension plans that have suffered losses through dishonesty.
However, since its inception, doubts about the eligibility of applicants have caused significant delays in its operations regarding pension scams. In its 16 years of existence, FCF has so far only paid out 10 schemes worth around £ 5million.
We believe that the government must urgently review the Fraud Compensation Fund and the levy that underlies it
The main difficulty was with scams – vehicles set up specifically for the purpose of fraud – which may not have a traditional connection to an employer.
This issue was settled in November 2020 after the PPF and Dalriada sought clarification from the High Court, which ruled that any occupational scheme subject to the FCF levy is eligible for compensation in the event of fraud.
Following the court ruling, nine claims totaling £ 40million have been received, and more are expected after eligibility criteria have been confirmed.
The PPF is “aware” of an additional 117 possible claims with a potential value of over £ 358million, but the FCF itself only has assets totaling £ 33.9million.
In April 2021, the FCF levy was raised to the maximum authorized by law of 75p per member and 30p for members of the master trust.
However, the PPF noted in its annual report that “this tax alone would not be enough to fund all potential claims, if they crystallized, so we worked with the DWP to resolve the funding gap by securing a loan. from DWP to FCF ”.
With legislation allowing Secretary of State to grant loan to PPF board receiving Royal Assent on October 20, DWP now consults on fraud compensation tax increase so loan can be repaid by 2030-2031. .
The loan is expected to cover 122 projects and amounts to around £ 250million over the period 2021 to 2025, the DWP said.
If no change were made to the levy, the loan “would not be fully recovered until about the 2040s,” he added.
“It would be an unreasonable length of time for the FCF to be in deficit and would be contrary to the principles of government accounting,” the DWP noted.
“The government does not believe that maintaining the current levy cap is a realistic option and therefore does not consult on such a possibility.”
DWP rejects changes to the structure of direct debits
The DWP has taken note of the suggestions to restructure the levy so that it is no longer based on the number of members of each occupational pension scheme, as some argue that master trusts with a large number of members, or small pots, or both, are disadvantaged by the current structure.
Darren Philp, policy director at Smart Pension, agrees with this suggestion. “While it is quite normal for victims of FCF-eligible pension scams to do so, hammering away at savers and auto-enrollment providers by funding the per-member deficit is unwarranted, unfair and unfair. “, did he declare. noted.
“It boggles the mind that the government thinks it is fair that savers in self-enrolled master trusts, often making minimum contributions and with the smallest pots, disproportionately pay the costs of this type of fraud,” even with a lower amount per member. compared to assets under management in other types of plans.
“We believe the government needs to urgently review the FCF and the levy that underlies it.”
However, the DWP said that due to the current structure with a “considerably lower levy” for master trusts, “there are no plans to change this arrangement, which should mean that the burden of levy is compensation for fraud to be absorbed by master trusts is significantly lower than the charge to be absorbed by most other regimes ”.
David Brooks, CTO of Broadstone, noted that the proposed increase will make the “FCF levy a bigger expense for pension plans and underscores the scale of the problem of pension scams.”
PPF pays £ 1bn, but fraud claims raise concerns
The Pension Protection Fund paid out £ 1bn in compensation to members in 2020-2021, but there are concerns as potential claims worth more than £ 358m against its compensation fund frauds far exceed the money available to pay for them, according to the PPF’s annual report. report.
“However, it’s hard to balance. As usual, and as we see with the Financial Services Compensation Scheme in the advisory market, it is the remaining pension plans that compensate for losses caused by immorality and corruption that commit pension fraud ” , did he declare.
“Although difficult to take, I think it’s through this lens that we should see this increase. Previously, it was very difficult for those who lost their pension savings to obtain compensation. Another important avenue for these victims is the decision last year that allowed schemes to claim through the FCF.
“It is hoped that greater awareness of scams and their methods will make future increases unlikely, but with the size and scope of scams not entirely clear to any of us, we may need to- be preparing for future increases, or even a complete overhaul of the model. . “
On calls for a substantial overhaul of the levy structure, the DWP said: “The government believes that the Fraud Compensation Levy and FCF continue to operate broadly as intended.”