An adviser has been told to compensate a client it told to transfer out of Equitable Life and redirect future contributions from his pension plan to Scottish Widows and Scottish Life.
In 2014, Mr M complained about CBC UK Limited’s advice to transfer and redirect future contributions from his former Equitable Life pension plan into his existing plans with other providers, when Equitable Life closed to new business.
The payments under dispute were put into unit-linked existing policies Mr M had with Scottish Widows and Scottish Life, which didn’t have a guaranteed annuity rate (GAR).
Mr M said this recommendation resulted in the valuable GARs he had with those other providers being ‘blended’ with more funds that attract standard annuity rates.
Mr M said he would have been better advised to invest into totally separate plans.
Addressing the complaint, CBC knew that Mr M was moving away from Equitable Life because it was in difficulties caused by the value of its own GARs.
So CBC stated it couldn’t have ignored the benefit to Mr M of maximising the value of his GARs with other providers when it made it’s recommendation back at the turn of the century.
At that time, CBC stated it contacted Mr M’s other providers to find out if GARs were available, and was told that they were.
But when the Financial Ombudsman Service looked into the complaint it ruled CBC would’ve been able to establish that Scottish Widows and Scottish Life had already stopped allowing GARs on new contributions (above the existing level).
Fos also ruled it might not have been clear that Mr M would specifically want to take a pension from the GAR part and leave the non-GAR part invested. He already had flexibility as a result of the number of policies he held.
Fos ruled it would have been reasonable to think he might draw all of his pension from a particular plan at once.
But it was foreseeable that he would want to extract the maximum value from his GAR when he drew his benefits. And even if he drew an annuity from all his fund, CBC should’ve considered that the rate that provider applied to the non-GAR funds was unlikely to be the most competitive at all times.
CBC argued it was unreasonable to expect a prudent financial adviser in 2001 should have foreseen that there would be any significant difference between annuity rates offered on the open market, and those offered by a reputable provider such as Scottish Widows on the non-GAR funds.
The adviser argued the decline in annuity rates may partly have been due to a fall in bond/gilt yields plus the government’s quantitative easing programme has pushed down gilt yields.
A reasonably prudent financial adviser operating in 2001 couldn’t have foreseen such developments and the prolonged period of low interest rates, CBC argued.
CBC also hit back at Fos arguing the rules on time barring of complaints operate to prevent stale claims and the difficulties inherent in dealing with matters that occurred some considerable time ago.
But Fos rejected the call for the complaint to be time barred.
According to Fos Mr M had provided a plausible and persuasive account that it was only when he was about to retire that he asked if he could take his GAR benefits separately, which was within three years of when he complained in 2014.
Fos stated it was clear that being told by Scottish Widows that he had to take his GAR and non-GAR benefits at the same time was the trigger for Mr M’s complaint.
In a final decision, ombudsman Gideon Moore said he considered CBC’s suggestion that it would have gone beyond its duty of care to foresee that there would be any significant difference between annuity rates offered on the open market, and those offered by Scottish Widows or Scottish Life on its non-GAR funds.
Looking at annuity comparison tables in December 2000, Mr Moore said Scottish Life wasn’t actually marketing annuities to new customers.
Scottish Widows did market annuities, and of the 13 freely accessible providers in the table at that time it ranked eighth (for a joint-life level pension at age 65).
Scottish Widows’ rate was about 6 per cent less than the best provider and about 13 per cent better than the worst.
Mr M’s ability to take the open market option to obtain a potentially better annuity rate was a fundamental feature of the policies he held.
If he was seeking advice at the point he came to retirement, Mr Moore said an adviser acting in his best interest would want to ensure he maximised that opportunity alongside any GAR.
Mr Moore said: “I understood why CBC thinks that the generally unforeseen economic circumstances since 2008 haven’t helped the decline in annuity rates. But this doesn’t diminish the fact that providers’ GARs were already starting to ‘come into the money’ in 2000.
“That led to the problems that Equitable Life for example was having. But I agreed that some of the other points CBC mentioned did affect whether the outcome I proposed would be a workable solution to Mr M’s complaint.”
For future contributions, Mr Moore ruled he thought Mr M would’ve still split these between Scottish Widows and Scottish Life.
But there was one exception with the part of the transfer made into unit-linked funds with Scottish Widows.
Mr M would’ve been allowed to set up a new PPP with that provider to receive a transfer value, without this counting as a new pension contribution.
So providing he made no ongoing pension contributions to that PPP, it wouldn’t cause his salary to be capped when calculating the contributions he could still make to his RACs.
So Mr Moore said he thought there was still a case to be made for saying Mr M should’ve made part of his transfer into a PPP with Scottish Widows instead – and working out compensation just for that transfer.
CBC was told to contact Scottish Widows to obtain an actual breakdown for the value of Mr M’s policy on his 60th birthday plus blended annuity rates and compare these to the best market annuity rate when Mr M was aged 60.
If a loss was made, CBC was told to pay this amount after reducing it by 40 per cent to take into account his marginal rate of income tax in retirement.