The Financial Conduct Authority (FCA) has published (27 October) its final guidance for the calculation of the redress owed to consumers who were given unsuitable advice to transfer out of a defined benefit (DB) pension scheme.
Changes include a revision of the inflation rate to reflect changes to data published by the Bank of England, and the removal of the life-styling element in the pre-retirement discount rate.
According to regulator’s calculations, these changes mean that the value of DB scheme benefits at calculation date could increase by more than 20 per cent in some cases.
Any redress payments would be based on this value compared to the value of the consumer’s personal pension – which will vary greatly between consumers.
The FCA goal was to change the methodology used for calculating redress, which was originally created to deal with the barrage of complaints from the pension review of the 1990s.
This updated guidance applies to any complaint received by a firm after 3 August 2016 about advice given to a customer to transfer all or part of the cash value of accrued benefits under a DB pension scheme into a money purchase arrangement.
This might include a personal pension, stakeholder pension, or other defined contribution scheme. It also applies to any such complaint received before 3 August 2016 but not settled on a full and final basis on or before that date.
Under the new rules, for example, for an individual that will retire in 20 years with a pension of £3,100 per year, the scheme benefits would be valued at £51,700, 26.7 per cent more than the previous calculations.
The FCA considers, however, that it is unlikely that affected consumers will have more than 15 years until retirement.
The updated values, which are in most cases higher than existing ones, are nonetheless lower than the ones proposed in the consultation.
| Value of DB benefits at calculation date | |||
| Example | Existing methodology | Methodology as consulted on | Updated methodology |
| Retire immediately; scheme pension of £2,000 p.a | £51,600 | £56,800 (+10.1%) | No change |
| Retire in 2 years; scheme pension of £2,100 p.a | £52,200 | £56,000 (+7.3%) | £55,000 (+5.4%) |
| Retire in 7 years; scheme pension of £2,300 p.a. | £51,300 | £53,500 (+4.3%) | £52,100 (+1.6%) |
| Retire in 15 years; scheme pension of £2,800 p.a. | £44,600 | £54,000 (+21.1%) | £52,300 (+17.3%) |
| Retire in 20 years; scheme pension of £3,100 p.a. | £40,800 | £53,400 (+30.9%) | £51,700 (+26.7%) |
PWC produced a report used by the regulator in its consultation document on this subject, which was published last March.
The new guidance also allows for the use of the actual personal pension charge where known, up to a maximum of 0.75 per cent, for future personal pension charges.
Mortality rates have been revised, and should now be calculated using tables from Institute and Faculty of Actuaries’ Continuous Mortality Investigation, assuming male and female mortality in equal parts.
Where known, the actual age of a customer’s spouse should be used. Otherwise, the spouse is considered to be the same age as the customer.
The FCA also said that it should be assumed that 85 per cent of individuals will be married at retirement. For actual loss cases only, the actual marital status at date of crystallisation should be used, if known.
Where a cash enhancement was paid in addition to the transfer value, the cash enhancement should be rolled up from the date of payment to the calculation date using 50 per cent of the return on the FTSE100 Total Return Index. This will reflect the fact that markets are often volatile.
The regulator announced in August 2016 that it would review the redress methodology. The consultation on this matter closed in June.
maria.espadinha@ft.com
