The Financial Conduct Authority has said redress on bad defined benefit transfer advice should be paid into the consumer’s personal pension to ensure it is used to make up pension shortfalls.
In a consultation paper called Calculating redress for non-compliant pension transfer advice, published today (August 2), the FCA said reinstatement of redress into the original DB scheme would give “absolute certainty” that the consumer has been put back into the position they would have been in.
Redress aims to put consumers back in the position they would have been in had they remained in their DB scheme.
But the trustees of many DB pension schemes have either closed them to new members or are unwilling to agree to reinstate benefits for members who have left the scheme.
Some schemes may also no longer exist, having wound up and there is no legislation which compels trustees to accept former members who transferred out.
“Similarly, we have no power to require it. For these reasons, we do not consider that reinstatement would be a viable option for most consumers,” the FCA said.
As a result, the FCA is proposing that where possible, redress is used to augment the consumer’s defined contribution pension.
“We consider this will make it more likely that redress payments are invested for retirement,” the regulator said.
The FCA explained that consumers who received unsuitable advice should ideally be reinstated in their DB scheme but if reinstatement is not possible, redress should be provided by the consumer’s DC pension.
“This is because the methodology presumes redress is invested and grows until the date of retirement and augmentation provides a reasonably straightforward way of achieving this,” it said
“Our proposed rule does not prevent firms from buying the consumer an annuity matching the benefits of their DB scheme if the firm and the consumer are willing to do this to settle their case. Likewise, where the DB scheme is willing to reinstate the consumer’s benefits, the firm is willing to pay for their reinstatement, and the consumer wants this to happen, this would also be allowed.”
Changes to redress methodology calculation
Since the FCA’s last periodic review of the methodology in 2016-17, the regulator said it had become concerned the existing approach for calculating redress was not transparent.
Although the current methodology remains appropriate and fundamental changes are not needed, the FCA said it is proposing some updates to help ensure the guidance continues to reflect “actuarial best practice” and is responsive to consumers’ individual circumstances.
Under the current approach, firms should calculate redress in accordance with the relevant provisions governing the Pensions Review.
These were published by the FCA’s predecessor regulators, the Securities and Investments Board and the Personal Investment Authority - two organisations which haven't existed since the late 1990s.
Firms currently need to refer to both the Pensions Review provisions and the FCA’s handbook, section FG17/9, for the methodology and assumptions for calculating redress.