The Financial Conduct Authority (FCA) is consulting on updating the methodology used when calculating the amount of redress payable in cases where the advice given to individuals to transfer from a defined benefit (DB) pension scheme to a personal pension was unsuitable
The consultation follows PwC’s review of the existing methodology, for the FCA, with the firm providing its recommendations for a new methodology.
On the back of PwC’s recommendations the FCA want to change the current redress methodology, including the underlying assumption, so that it takes into account the changes to the pensions environment.
The review follows 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 and individuals who are unhappy with the advice they have received may continue to complain to firms.
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); and
- updating these assumptions on a regular basis to reflect the fact that markets are often volatile.
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 deadline for comments in 10 June 2017, with the FCA estimating to publish finalised guidance bu autumn 2017.
Consultation on changes to the way firms calculate redress for unsuitable defined benefit pension transfers is available here.
