Financial Services Compensation Scheme 

Advisers call for FSCS discount rate change

Advisers call for FSCS discount rate change

Financial advisers are calling for more consistency between the discount rates used when giving advice on pension transfers and those used for calculating compensation for clients.

Since 2017 the Financial Services Compensation Scheme (FSCS) has been using a discount rate of 3.7 per cent, based on 50 per cent investment in equities, to calculate the compensation due to a claimant in a failed pension transfer case.

However, since October, financial advisers have been asked to use a transfer value comparator (TVC) for defined benefit (DB) transfers – which means they have had to calculate the cost of buying the client’s benefits on an open market using a risk-free rate of 1.6 per cent.

The difference between the two figures came to light last week in the plight of the British Steel workers who were asking the FSCS to use the 1.6 per cent rate instead of the 3.7 per cent currently being applied.

Philippa Hann, solicitor at Clarke Willmott and representative of the steelworkers, told FTAdviser: "I find it a very difficult situation for the FCA to hold having two different calculations, established one year apart."

She explained when calculating compensation, the FSCS compares the actual value of the individual’s pension pot with purchasing the benefits from the ceding scheme at age 65, with the resulting value being discounted to today’s date, since these savers will receive that money early.

She said: "If you are putting these people where they would have been if they were properly advised, they would be in the BSPS II which is a no-risk ceding scheme. It has safeguarded benefits.

"The FCA's own rules provided under Cobs 19 [the TVC] show how to calculate the cost of replacing the benefits in a safeguarded benefit ceding scheme, and I don’t see why they won’t be compensated on this basis."

An FSCS spokesperson told FTAdviser the discount rate that "applied in the BSPS cases has been used in all such redress cases, in line with FCA guidance".

He said: "There are other discount rates which could be applied, but we would need a compelling reason to use a different one, because we must act consistently. We are very happy to continue to listen to representations from stakeholders on this and related issues."

Ricky Chan, director and financial planner at IFS Wealth and Pensions, said there needed to be more consistency applied to both calculations.

He said: "Otherwise, not only is it confusing, but it also leaves the possibility of anomalies being created where clients may be better or worse off, simply due to their circumstances and the past performance of equities at the date of their redress (due to the assumption of 50 per cent expected return on equities while consumers are at least five years away from retirement)."

Andrew Boyt, pension transfer specialist and freelance consultant, agreed, adding that all calculations in respect of DB transfers should be "carried out using the same parameters since they should always be centred on ‘putting the client back in the situation they were in before the advice was given’".