The Financial Services Compensation Scheme is calling for the compensation limit of £85,000 to be reviewed for pension claims, with the hope of reducing the gap it has with the Financial Ombudsman Service.
In a paper published alongside its latest outlook today (May 26), the FSCS said it believes the current compensation limits remain appropriate for most products and activities it covers but needs to be higher when it comes to pension claims.
“There is an important exception when it comes to pensions,” it wrote. “In this specific area we believe that the FSCS compensation limit of £85,000 should be higher.
“We would like to see it reviewed, with a view to reducing the gap between FSCS’s limit and the amount that the Financial Ombudsman Service can tell a business to pay, which is £375,000 as of April 1, 2022.”
This comes as earlier today, the FSCS reduced its levy for 2022/23 by £275mn to £625mn, saying there have been fewer self-invested personal pension provider failures and less complex pension claims.
In 2001, the FSCS became a single compensation scheme and was able to cover £31,700 of the money held by consumers in their bank or savings account and £48,000 for any investment business claims, which includes claims for pensions advice and switching, and the failure of self-invested personal pension operators.
Since then, the deposit compensation limit has risen three times to £35,000, £50,000, and £85,000.
Yet the investment limit, which applies to most pension claims, has risen only twice, to £50,000 and then £85,000.
“Although today both limits are equal, they did not start that way,” the FSCS said. “The deposit limit rise between 2001 and today has out-paced inflation, whereas pension protection is broadly worth the same as it was in 2001.”
“The limit for pensions and investments is now harmonised with deposits and most other FSCS limits, including products like debt management plans where losses are likely to be very small.”
Following consultation in 2018, the Financial Conduct Authority said from April 1, 2020 onwards, the Fos limit would be adjusted in line with inflation, as measured by the consumer price index.
But the FSCS argued that “no such mechanism” currently exists for its limits, despite there being a strong case for it to be introduced.
“In the 2018 consultation the FCA said that while the number of ‘high value’ complaints is relatively small, there was a risk of very significant financial harm to complainants if they did not receive the full amount of compensation the ombudsman service considers due,” it wrote.
“Complaints above the previous award limit typically involve insurance that protects consumers from a significant loss, advice on long‑term investments that provide an income in retirement, or the investments themselves. We believe the same is true for customers who have a claim with FSCS.”