The Financial Conduct Authority (FCA) has announced proposals for updating the methodology used to calculate the redress owed to consumers who were given unsuitable advice to transfer out of a defined benefit (DB) pension scheme.
The FCA announced in August 2016 that it planned to review the methodology following concerns that there may be more appropriate ways to calculate redress so that consumers are more likely to replicate the benefits that they held in their DB pension scheme.
Any changes to the methodology will apply to future redress payments only. Consumers who are unhappy with the advice they have received to transfer out of their DB scheme may continue to complain to firms. Where redress is due, a complaint should not be settled on a ‘full and final’ basis until the outcome of the consultation is known. The FCA intends to reach its conclusions by autumn 2017.
Christopher Woolard, executive director of strategy and competition at the FCA, said: “Choosing to transfer out of a DB pension scheme is a big decision for consumers, which requires suitable advice. When that advice proves to be unsuitable, it is important that consumers receive appropriate redress.
“We think that there may be more appropriate ways to calculate redress for pension transfer complaints in future, and that is why we are looking at how the calculation works in order to achieve a fair outcome for consumers.”
The FCA’s proposed changes to the methodology include:
- Updating the inflation rates used to better reflect likely inflation
- Updating the pre-retirement discount rate so that it acknowledges the Pension Protection Fund (PPF)
- Updating the post retirement discount rate and acknowledging the likelihood that consumers will take a pension commencement lump sum
- Updating the mortality assumptions
- Making allowance for gender-neutral annuity rates
- Assuming that male and female consumers are the same age as their spouse to simplify the approach
- Simplifying the assumption about the proportion of people married or in a civil partnership at retirement
- Making allowance for enhanced transfer values (ETVs)
- Updating these assumptions on a regular basis to reflect the fact that markets are often volatile.
