The pensions levy of 0.6% of the value of pension funds at 1 January 2011 has been announced, but the details are not yet clear until the enabling legislation is enacted. A Bill containing the proposed measures is expected to be issued towards the end of next week (Thursday 19th May).  However, Mercer have prepared a short note to brief you on the potential implications of the levy.

Defined Contribution/AVC schemes - actives and deferreds

For DC/AVC members, it looks as if the levy will be calculated based on the value of a member's fund on 1 January 2011.  The levy will be deducted from the member's fund, but how the mechanics work is not yet clear.  It is also not clear what happens if funds have been disinvested and paid out or transferred elsewhere since 1 January.

Defined Contribution schemes - pensioners

It seems as if the levy will not apply to pensioners, assuming they retired before 1 January 2011 and took their benefits, either in cash or annuity form or by transfer to an ARF.  Again, however, we need to see the details.

Defined Benefit schemes - actives and deferreds

For DB scheme members, the impact of the levy on their benefits is even less clear.  In a DB scheme, the members do not have their own identifiable "pot" of money from which the charge can be deducted.  Instead, the levy will apply to the bulk value of the assets.  If the employer meets most of the cost of the scheme, it may be that the employer will ultimately bear the cost of the levy. However, it has been indicated that the legislation will allow schemes to pass on the levy to members in the form of a reduction in the benefits they currently receive (if they are pensioners) or are due to receive (if they will be pensioners in the future).  How this would work, and whether schemes would choose to do so, remains to be seen.

Defined Benefit schemes - pensioners

As mentioned above, it has been indicated that the enabling legislation will allow schemes to pass on the levy to pensioners in the form of a reduction in the pension they currently receive.  How this would work, and whether schemes choose to do so, remains unclear.  It may be up to each scheme to decide whether and to what extent the levy would be passed on to pensioners.  If pensions are to be reduced, it is likely that the trustees of each scheme will write to members outlining how they will be affected.