The Financial Services Compensation Scheme (FSCS) has confirmed that its annual levy for 2024/25 will be £265m, following a fall in average compensation values on pension transfer claims, and the number of new claims expected.

The FSCS’ latest Outlook update revealed that the total levy payable by firms for the 2024/25 financial year had fallen from the indicative levy announced in the November 2023, also marking a small decrease from the final 2023/24 levy of £270m.

According to the FSCS, the organisation successfully recovered more than £54m from the estates of failed firms and other relevant parties during 2023/24, helping to reduce the levy.

However, the movement in the latest forecast was mainly driven by two funding classes, Life Distribution & Investment Intermediation (LDII) and General Insurance Provision, as the FSCS recorded a fall in the average compensation values on pension transfer claims, as well as a fall in the expected new claims.

In particular, the FSCS revealed that the levy payable by firms in the LDII class is now £66m, a £75m decrease from November’s indicative forecast, after the compensation for this class in 2023/24 fell to £130m, £51m lower than the November 2023 forecast.

This was mainly due to reduced average compensation values on pension transfer claims, lower payment volumes for British Steel Pension Scheme (BSPS) pension claims and fewer firms failing than expected during the redress scheme.

Indeed, the FSCS revealed that the average compensation amount on pension transfer claims was around £35,000 in 2023/24, whereas in 2022/23 it was almost 30 per cent higher at around £45,000.

These lower compensation costs resulted in an additional £57m surplus, which was carried forward and used to offset the 2024/25 levy.

The levy for those in the Life and Pensions provision class, which is driven by provider contributions to the LDII class, has also fallen by £11m since the November estimates, with a final levy of £10m in 2024/25.

Further falls are also expected, as the LDII class’s compensation forecast for 2024/25 decreased by £68m, from £224m to £156m, due to a reduced uphold rate and lower average compensation value for pension claims since the initial forecast.

In addition to this, the FSCS confirmed that it is now expecting to receive fewer new claims and forecasting lower compensation costs for special administration firm failures.

However, the FSCS clarified that the reductions in the total compensation forecast for 2024/25 have been partially offset by an £8m increase in the Investment Provision class’s forecast.

This includes anticipated additional compensation for claims against self-invested personal pension (SIPP) operators under Section 27 of the Financial Services and Markets Act 2000 (FSMA).

Indeed, the FSCS noted that it already paid out £38m in compensation for Hartley Pensions Ltd in February 2024, increasing its compensation forecast from November by £15m.

The Hartley Pensions Ltd compensation payments also led to a reduced 2023/24 closing balance, and less funds than the FSCS initially forecast being carried forward to offset the 2024/25 levy.

In total, the FSCS currently expects to pay £363m in compensation during 2024/25.

Commenting on the latest update, FSCS interim chief executive, Martyn Beauchamp, said: “We made a number of successful recoveries in 2023/24, with more than £54m recovered from the estates of failed firms and other third parties.

"This has added to surpluses in some funding classes being carried forward. We’ve used these surpluses to reduce the levy for 2024/25 to £265m.

“In addition, we’ve refined our forecast for the year ahead – learning from what we’ve seen recently and taking note of persisting trends. This means a reduction in the compensation we expect to pay in 2024/25 which now stands at £363m.

“As always, we will keep the industry informed of any changes to our forecasts in a timely fashion. The next Outlook will be published in the autumn.”

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