With the Financial Conduct Authority’s proposed “polluter pays” framework, firms will have to plan carefully when it comes to pension transfer redress, which can often be difficult, according to one actuary.
Speaking at the Pensions Playpen session this week (February 20), Sarah Abraham, head of pension redress services at First Actuarial, outlined why and how IFAs should plan for pensions transfer redress.
The FCA’s “polluter pays” model will hit more than 5,500 firms and investment intermediaries would be affected under the proposals.
More specifically, firms which are in scope are “those that mainly provide adviceand retail investment products and are exempt from the UK’s interpretation of Mifid”.
Additionally, those under the asset retention rules will see personal investment firms set aside capital so they can cover compensation costs.
Pension Playpen said with the British Steel scheme still rumbling on, and the “polluter pays” proposals to digest, pensions transfer redress should be firmly on the agenda for firms that have written defined benefit transfer advice.
However, understanding how pensions transfer redress works can be challenging.
Abraham explained how pensions transfer redress is calculated and why it poses a significant risk for IFAs.
“Pensions transfers are getting attention because the FCA isn't massively keen on them; their starting point tends to be people shouldn't be transferring out and people are better off in a DB scheme,” she said.
“Secondly, we know that pension transfers - both DB and DC - can result in quite high redress payments and thus, if you're having to hold reserves, you are more likely to hold more if you've written DB transfer advice in particular.”
She explained firms need to take this seriously and will need to identify and quantify potential redress liabilities.
They will need to outline those that fall into the category of either unresolved complaints that have already been received, or respective where redress may be needed in the future.
“The [latter] is a much harder thing to define and what we find is different firms interpret that in different ways,” she said.
“Then you quantify the redress for that and estimate how much you think it might be, which is not easy, and then you apply a probability factor to reflect that not all claims will result in redress.”
After calculating the uphold rate, and also considering there could be a lot of people who won't complain or claims that won't come to fruition, firms will set aside capital with this asset retention requirement.
“It's a high hurdle to prove that advice was suitable,” Abraham said.
“It can go around in circles and you get situations where a firm that reviews its advice finds it suitable, the FCA reviews advice and finds it suitable and then the Fos says it's unsuitable.”
Managing risk
Abraham explained it was important to understand redress and what the factors impact on redress.
“That's an important first step and with the consumer duty, firms should be doing that anyway,” she added.
“It's also worth understanding your PII position. So, as an example, some PII insurers will not cover cases where the advice was given to somebody who was under 55 at the point of the advice.
“That's problematic because actually, if you have written advice to people who are under minimum retirement age, it's really, really hard to show that's suitable - that's an even higher hurdle.”
She told firms there was no point in looking at redress day to day because it can change but understanding if the client book is healthy was important.
“In terms of understanding what exposure you have - and this plays into the polluter pays proposals if they do take effect - there are options you could use to fulfil FCA requirements.”
One option is to look at a firm’s excess so typically, PI insurance will have an excess per case and firms could just look at the number of potential cases that might be raised and multiply that by that excess.
“If you've written a lot, you might be going over your limits of indemnity so your limited cover might not be enough or you might have cases that are excluded, which you'd need to think about separately.
“The consultation paper from the FCA very much guides people down a route to look at what's been paid in the past and adjust it for the circumstances of your case.
“This sounds right in theory, but in practice, how you would adjust that is difficult.”
Abraham said another option that people will often use is to look at the total transfer value they have paid and multiply it by percentage.
The going rate for the British Steel was 16 per cent which was the one fiirms had to use in the first of the British Steel asset retention tests.
However, she argued this percentage was not really the right one to use for most schemes because British Steel's got very specific circumstances in that people were either going to end up with Pension Protection Fund benefits or BSPS benefits.
“So in theory, the redress is lower on British Steel than any other scheme would be and that's partly what we're seeing come through,” she said.
A more robust option would be to do an accurate calculation for every case which might work but firms need to ensure there is enough data.
sonia.rach@ft.com
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