The Department for Work and Pensions (DWP) has launched a consultation on potential plans to increase the general levy on occupational and personal pension schemes, in an effort to mitigate the ongoing deficit in levy funding.

The consultation is seeking industry views on three options to mitigate the levy funding deficit over the next three tax years, covering levy rates for the years 2024/25, 2025/26 and 2026/27.

The options were previously agreed by ministers after estimates from the DWP revealed that, if levy rates were to remain unchanged, there would be a deficit of over £200m by 2031.

Two of the options would leave the levy structure unchanged, while the third option, which has been identified as the DWP's preferred option, would involve a small change to the levy structure to better reflect the current focus of the regulatory regime.

In particular, option one would continue with the current levy rates and structure, which would see the levy deficit continue to grow, requiring greater rises at a later date.

However, both option two and three aim to bring levy income into balance with levy expenditure over the medium term, currently forecasted by 2025, and to recover the accumulated deficit by 2030.

Under option two, the government would retain the current levy structure, but increase the rate by 6.5 per cent per year, which would bring the cumulative deficit back into a compliant level by 2031.

The third option, meanwhile, would increase rates by 4 per cent per year and signal an additional premium rate for small schemes (with memberships up to 10,000) from 2026.

This option would also add a premium to schemes which as of April 2026 have memberships under 10,000, allowing for a lower initial increase across all schemes, while still paying off the deficit, and supporting the consolidation of smaller schemes.

The consultation stated: “Whilst reviewing the options we have considered the cost of the increasing challenges that the changing pensions landscape and the future direction of policy development bring.

“This has been balanced against the requirements for clear and robust administration of schemes, protection of savers money and investment in the UK infrastructure.

"Setting a sensible levy structure and rates to reflect and support these changes in direction will inevitably come with a financial cost that should be fair and equitable, across scheme types. We have aimed to reflect this in the options we have set out.”

The government is looking to introduce changes to the levy rates from 2024/25 to 2026/27 following the consultation exercise.

However, the DWP's consultation acknowledged that there are a number of external factors that may affect its projections over time, such as the projected growth in defined contribution (DC) scheme membership and consolidation.

Given this, it confirmed that it will adjust any estimates as part of continuing yearly reviews, and that it will consult again if it subsequently proposes to change the rates for any of these years, and for the years that follow.

The DWP also revealed plans for a separate consultation on how The Pensions Regulator (TPR) could be fully funded by the pensions sector, taking account of timing given the levy deficit, and the appropriate distribution of costs across the industry.

This was one of 17 recommendations recently highlighted in the independent review of the regulator, with government agreeing that the pensions industry has benefitted "hugely" from the inflow of AE members, and that the sector, rather than the taxpayer, should pay for the employer compliance regime.

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