RegulationMar 10 2017

FCA to overhaul pension transfer redress calculations

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FCA to overhaul pension transfer redress calculations

The Financial Conduct Authority (FCA) plans to update the calculation for the redress owed to consumers who were given unsuitable advice to transfer out of a defined benefit (DB) pension scheme.

The methodology was originally created to deal with the barrage of complaints from the pension review of the 1990s.

The FCA’s proposed changes to the methodology include updating the inflation rates used to better reflect likely inflation and changing the pre-retirement discount rate so that it acknowledges the Pension Protection Fund (PPF) exists.

The post retirement discount rate is also set to be updated to acknowledge the likelihood that consumers will take a pension commencement lump sum.

Mortality assumptions are also set to be revised plus allowances will be made for gender-neutral annuity rates.

The compensation calculation will also now assume that male and female consumers are the same age as their spouse to simplify the approach plus the assumption about the proportion of people married or in a civil partnership at retirement will be changed.

An allowance for enhanced transfer values (ETVs) will be made and the regulator proposes updating assumptions in the calculation on a regular basis to reflect the fact that markets are often volatile.

It was back in August 2016 that the regulator revealed it planned to review the methodology following concerns that there may be more appropriate ways to calculate compensation so that consumers can replicate the benefits they held in their defined benefit pension scheme.

According to the watchdog, any changes to the methodology will apply to future redress payments only.  

Consumers who are unhappy with the advice they have received to transfer out of their final salary pension scheme may continue to complain to firms.  

Where redress is due, a complaint should not be settled on a ‘full and final’ basis until the outcome of the consultation published today (10 March) is known, the regulator stated.  

The FCA intends to reach its conclusions by autumn 2017.

Christopher Woolard, executive director of strategy and competition at the FCA, said: “Choosing to transfer out of a DB pension scheme is a big decision for consumers, which requires suitable advice.  

“When that advice proves to be unsuitable, it is important that consumers receive appropriate redress.

“We think that there may be more appropriate ways to calculate redress for pension transfer complaints in future, and that is why we are looking at how the calculation works in order to achieve a fair outcome for consumers.”

emma.hughes@ft.com