FCA consults on transfer advice redress

FCA is consulting on updates to how it calculates redress for unsuitable DB pension transfer advice. The consultation:

  • confirms that FCA has carried out a review that shows that the current methodology is appropriate, but could do with an update to help ensure the guidance reflects actuarial best practice and responds to the circumstances of individual consumers. The paper also looks at how redress can best be paid into personal pensions in order to ensure it is used to make up pension shortfalls, as FCA is keen to ensure redress payments are invested for retirement rather than used for discretionary spending. The paper discusses the options of
    • reinstatement into the original DB scheme (which would obviously be the ideal solution to put the consumer back in the position they would have been in)
    • requiring firms to buy annuities for the consumer – either a replicated deferred annuity or an immediate annuity;
    • providing a guarantee at retirement; but concludes all these options have challenges so firms should continue to use the current approach of lump sum payments into the consumer’s DC pension
  • sets out proposed clarifications and changes including improvements on determining the consumer’s retirement date and how redress payments are explained to consumers;
  • confirms that firms should for the moment carry on under existing guidance but that the updated requirements will apply to all cases that have not been settled when the changes take effect – and firms will need to give customers currently awaiting the calculation the option to wait until the outcome of it to settle their case;
  • addresses FCA’s specific proposals in relation to consumers who transferred out of the British Steel Pension Scheme. It plans, broadly, that if it decides to set up the redress scheme currently under consultation, the same methodology as in other DB transfer cases will apply, but with some adaptations;
  • sets out FCA’s proposals for a redress calculator for BSPS that will apply if FCA decides to set up a redress scheme, which it says will help make calculations more consistent. The paper acknowledges that respondents to its consultation felt that cash lump sum redress would not be appropriate as it would not achieve the objective of putting the consumer back in the position they would have been in had they not transferred out, and pointed out many dangers of redress in cash.  Most respondents favoured the options of reinstating the consumer in a DB arrangement or buying a deferred annuity.  FCA confirms that the trustees of BSPS2 say they cannot admit new members or readmit former members, nor can the BSPS1 admit new members or readmit former members following it entering the PPF and then being wound up.  FCA has no power to make trustees accept former members. FCA also feels it will face significant challenges in requiring firms to buy a deferred annuity but are happy to allow firms and consumers to agree on this as the form of redress. So it will encourage payment into DC schemes, but says that tax issues make it likely that at least some of the redress will be paid as a cash lump sum – but that where this happens firms must make certain facts clear to the consumer not least the assumption that the cash will be invested, not spent.  This part of the consultation also discusses whether the PPF or BSPS2 should be used as the comparator scheme and the redress methodology.

Consultation closes on 20 September.

Emma Radmore