The Financial Conduct Authority (FCA) will start a periodic review of the defined benefit (DB) pension transfer redress guidance by the end of 2021.
The guidance sets out how firms should calculate redress for unsuitable DB transfer advice.
It was first published in 2017, when the UK regulator committed to reviewing the guidance at least every 4 years.
The FCA said in a statement on 1 September 2021 that the guidance sets out its “expectations of firms while the review is ongoing, including clarifying how firms should be applying or interpreting the guidance in certain areas”.
The guidance is used by firms to put consumers back in the position they would have been if they had remained in their DB scheme. It is done by calculating appropriate redress where:
- Consumers received advice from the firm which was negligent or contravened relevant requirements; and,
- If the advice had not been negligent or had complied with the relevant requirements, the consumer would not have transferred all or part of the cash value of accrued benefits from the DB pension scheme into the personal pension scheme.
It is based on the approach for the pensions review of the 1990s, with the assumptions updated periodically since. The assumptions were last updated in 2017, to take account of changes in the pensions industry.
Expectations
While the periodic review is ongoing, the FCA said firms should continue to:
- Assess complaints about unsuitable advice fairly, consistently and promptly;
- Calculate any redress due in line with the current approach; and,
- Comply promptly with any offer of redress accepted by the consumer.
The UK watchdog has identified areas where firms may benefit from clarification on how it currently expects redress to be calculated when following the guidance.
It added: “Firms should ensure that they, or any actuarial specialist they have outsourced a redress calculation to, take the following actions when determining the amount of redress to offer. Firms not meeting these expectations should make appropriate changes to their processes before issuing any new redress offers.
“Where firms have already carried out calculations that do not meet the expectations in our guidance, it may be appropriate to review those calculations and contact consumers where they determine that additional redress may be due.”
Allowing for adviser and product charges
The FCA also said that redress “should enable consumers to cover the cost of ongoing product charges and regular adviser charges up to normal retirement age, both on the transferred pension and the amount of redress”.
For prospective loss cases:
- The redress figure “should allow for personal pension charges, where known, up to a maximum of 0.75% per year and allow for regular adviser charges on top of this”;
- The pre-retirement discount rate should be “netted down to allow for ongoing product charges and regular adviser charges in percentage terms up to normal retirement age”;
- Regular adviser charges “should be assumed to continue in full, at the current level”; and
- Where firms use any other method to take account of future product and ongoing adviser charges, they should make sure the result “achieves the same intent”.
For actual loss cases, the personal pension value used for the redress calculation “should take account of any adviser charges that were incurred when the pension moved into decumulation at retirement”, the FCA said.
It added: “Where another firm is giving ongoing advice, firms should allow for ongoing adviser charges. This is to compensate the consumer for charges that they would not have incurred if they had not been advised to leave their DB scheme.”
It also highlighted that where redress is paid in the form of a lump sum, it should be adjusted to take account of the consumer’s individual tax position and wider circumstances.
‘Sensible measure’
Tom Selby, head of pension policy at AJ Bell, told International Adviser: “Where someone has received inappropriate advice around a DB transfer, it is vital they are compensated fairly and as quickly as possible. Reviewing how firms undertake redress exercises is a sensible measure and should ensure any shifts in the market are captured.
“We won’t know the impact of this review on the DB transfer market until we see the outcomes and any changes that come from it. DB transfers are more likely to be affected by the regulator’s rules and approach – as well as broader market trends – than by guidance on how redress should be paid.
“That said, if the review were to result in changes which meant the average cost of redress went up, that could have a knock-on impact on the risks of advising on DB transfers.”
Jamie Jenkins, director of policy and external affairs at Royal London, told IA: “This is a periodic review which is largely designed to ensure that the redress process remains fit for purpose and takes account of any changes that might be required to reflect how the market has evolved.
“Following the events of the last few years, we have already seen a significant reduction in the number of advisers providing advice on DB transfers, but for those who still do, their processes should by now be fully compliant with current regulations and flexible enough to be reviewed in the wake of any further changes.”
