The pension levy was introduced under a seemingly innocuous piece of legislation, the Finance (No.2) Act 2011. The Act, insofar as it provides for the levy, is just 10 pages long.  Less is more?  Not in this case. While the dust hasn’t quite settled on the financial impact of the levy on struggling pension schemes, practitioners are still struggling to get to grips with exactly what some of the more technical requirements under the legislation mean, and how they can be complied with. The primary problem practitioners are having in deciphering what is required under the legislation is a lack of clarity, loose drafting and, in some cases, seemingly superfluous wording.  In the case of the Finance (No.2) Act 2011, the Government would have been well-advised to follow the approach of “more is more”. 

For example, who does the legislation intend should pay the levy? This, you would have thought, is a pretty fundamental question and while it is difficult to impose an unfair tax on a tax-paying pensioner or scheme member, it is also difficult to justify its imposition on struggling employers with already unmanageable defined benefit liabilities. Rather than giving clarity on this matter, the legislature seems to have come to the same conclusion and left the question of who bears the cost of paying the levy to trustees, employers and (to a lesser extent) employee representative groups like trade unions. The Act gives trustees the machinery to reduce member benefits if necessary but does not obligate them to use this power.  It then muddies the water by classifying the levy as a “necessary disbursement” of the pension scheme, a phrase which has no apparent relevance to the levy or what it is. 

In reality, the members will bear the cost of the levy under DC schemes other than where their employer makes a decision that it wants to bear the cost on behalf of the members. In a DB context, the answer is much less clear, but where a scheme is a balance of cost arrangement, the employer may be liable to pick up the cost and the trustees might therefore be slow to exercise their power to reduce benefits other than the most unusual situations. Such situations may include where an employer’s future commitment to the scheme is at stake or where the existing deficit is so unmanageable and unlikely to be funded that to add to that deficit (with the result of member benefits being scaled back anyway) would mean that trustees could expose themselves to a negligence action where they fail to exercise their legislative powers. 

This uncertainty is a very unsatisfactory result from a loosely drafted and unclear piece of legislation. With DB schemes in difficulty (and with the new funding standard proposed likely to make their position worse) and a real discontent amongst workers as to the level of taxes, levies and charges already being imposed, it seems the legislature has copped out of this one and left trustees and employers in extremely difficult positions.