At the start of this month, the Government launched a consultation that proposes increasing the Fraud Compensation Levy (FCL) to 65p per master trust member and £1.80 per other scheme member. This follows the April announcement from the Pension Protection Fund (PPF) that the 2021/22 levy would triple to 75p per member of every occupational pension scheme (with authorised master trusts being charged 30p per member).

The additional money is needed by the PPF to allow it to repay the loan agreed by Parliament last month under the Compensation (London Capital & Finance plc and Fraud Compensation Fund) Act 2021. The loan facility was granted as a direct result of the High Court case of PPF v Dalriada Trustees last November concerning a test case that involved fraudulent occupational pension schemes designed for “pension liberation”. The PPF’s annual accounts for the year ending 31 March 2021 suggest that the Fraud Compensation Fund (FCF) is now vulnerable to claims of over £400m from these sorts of frauds – way in excess of the £33.9m in the FCF at this point. The DWP says the loan is expected to cover claims relating to 122 schemes and amounts to approximately £250m over the period 2021 to 2025.  It would like to see its loan paid off by 2030/31.

As noted in the consultation document, commentators have previously suggested a wholesale review of the FCL - exempting schemes that maintain robust governance systems from payment and changing the calculation basis so that it is no longer based on the number of members in each occupational pension scheme. The Government has rejected all these suggestions. It maintains that all occupational pension schemes derive benefit from the existence of robust fraud compensation arrangements, which increase the level of consumer confidence in pension saving and, therefore, intends to maintain a system whereby the costs of the FCF are met by occupational pension schemes through the FCL. But is this reasonable?

Not all occupational pension schemes or frauds qualify for compensation from the FCF. For a payment to be made, either the scheme trustees, someone involved in the administration of the scheme or a member or beneficiary have to first make a claim. Many frauds are unreported. Before compensation can be paid, the statutory conditions require that there must have been a reduction in the scheme assets, which is attributable to an offence involving dishonesty. Dishonesty is not always easy to prove. Furthermore, the scheme’s employer must have suffered an insolvency event or be unlikely to continue as a going concern. Solvent employers cannot, therefore, benefit from the FCF and inevitably end up bearing the brunt of the costs of pension fraud unless criminal or civil proceedings result in a recovery to the scheme from the fraudster.

Whilst I agree with the Government that the cost of the FCF should fall on occupational pension schemes and not taxpayers, there remains a serious question as to whether a straight per member charge is appropriate given that access to compensation is only open to those schemes whose employer has suffered an insolvency event. Would it not be possible and fairer to factor in the insolvency risk of the employer when calculating a scheme’s FCF levy, in the same way as happens for the PPF’s risk based levy?

Furthermore, is a lesser per member charge for master trusts appropriate? The fact that the FCL is a per member charge is the reason why the Government considers master trusts should pay a lesser amount (as they have large numbers of members, many with small pots). Given the quality and authorisation regime to which master trusts are subject, one would expect those schemes to be at a lower risk of fraud committed by trustees and scheme advisers than other occupational pension schemes. However, the risk of an employer insolvency event and pension fraud against individual scheme members of master trusts would seem to be similar to that of other occupational schemes. Trustees of master trusts are subject to the same legal requirements as trustees of all occupational schemes in deciding whether they have legal grounds to refuse a statutory transfer request if they suspect a member is the victim of a scam. I am far from convinced, therefore, that it is reasonable for occupational schemes to pay a per member FCF levy that is over 2.75 times greater than the per member charge for master trusts. A lesser differential should apply if the per member calculation is to remain.

It appears, however, that in its consultation (which closes on 10 December 2021) the Government has opted for simplicity and speed by choosing to work within the existing structure of the FCL rather than undertake a full redesign. Perhaps that has something to do with wanting its money back by 2031?