FCA proposes DB transfer redress be paid into a DC scheme

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
FCA proposes DB transfer redress be paid into a DC scheme

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.

Calculating pension transfer redress is complicated and can involve life-changing sums of money.The FCA

“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 

Source: FCA

“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. 

However, the FCA explained that this approach requires firms to refer to several regulatory sources, some of which are not readily accessible, and isn't transparent. 

“Calculating pension transfer redress is complicated and can involve life-changing sums of money. So, the provisions must be as clear as possible to both firms, consumers, and other stakeholders.”

The regulator said “there is a strong case” for consolidating all calculation provisions as it would significantly increase transparency. 

 There is no legislation which compels trustees to accept former members who transferred out.The FCA

It proposed putting the redress calculator methodology in the handbook to improve consistency. 

“Consolidation also gives us an opportunity to consider whether the methodology should continue to be issued as guidance rather than rules,” it said. “Guidance is mainly used to explain the implications of other provisions, indicate possible means of compliance or recommend a particular course of action or arrangement.”

“The objective here would be to set out in one place both the overall approach to calculating pension transfer redress and the assumptions that should underpin this approach,” it added.

The FCA said it also aims as far as possible to reduce the impact of market volatility on calculations.

It proposes that a calculation is based on the difference between a valuation of the benefits given up in the DB scheme, and a valuation of the DC pot attributable to the transfer.

Calculations are currently made on a quarterly schedule which means that firms update the economic assumptions based on the market conditions at the close of business on the last working day of each quarter. 

The FCA is proposing calculations should move to a monthly schedule, meaning the economic assumptions would be updated on the last working day of each month.

BSPS scheme

In March, the FCA set out plans to deliver £71.2mn in compensation to former members of the British Steel Pension Scheme who received unsuitable advice to transfer out of their pension.

In the consultation paper today, the FCA also proposed for the general methodology to be used when calculating redress for BSPS cases. 

“The options for providing redress to consumers are limited by our powers and what

we can require firms to do,” it said. “We do not have powers to require consumers, or other

parties like scheme trustees, to take actions necessary for redress to be provided in a

particular way.”

The FCA said it has spoken to the trustees of the new British Steel Pension Scheme, set up following the ‘Time to Choose’ exercise, and the trustees of the Old British Steel Pension Scheme, which initially moved into the Pension Protection Fund, both of which said the governing documentation would not allow the trustees to admit new members or readmit former members.

“There is no legislation which compels trustees to accept former members who transferred out. Similarly, the FCA has no power to make rules requiring them to do so,” it said.

Requiring firms to pay as much redress as possible into the consumer’s DC pension by augmentation should help address concerns about whether consumers will invest their redress for retirement, the FCA said. 

“We are exploring the possibility of a redress calculator for the scheme which would take account of a consumer’s tax position and work out how much redress can be paid by augmentation before tax charges arise.”

It also proposed that where consumers made an active selection of either BSPS2 or the Pension Protection Fund at the time of the transfer, the redress calculation should be based on the benefits of the selected scheme. 

“If we decide to make changes to our general methodology and implement the proposed BSPS consumer redress scheme, we will aim to publish a policy statement (PS), including final rules, this winter,” it said.

“We would expect any BSPS redress scheme to come into force in early 2023, with most members who are eligible receiving compensation later in 2023 or in early 2024.”

This consultation will close on September 20, 2022. 

sonia.rach@ft.com

What do you think about the issues raised by this story? Email us on FTAletters@ft.com to let us know