Compensation for consumers given unsuitable advice to transfer out of a defined benefit (DB) pension scheme is to be changed under FCA proposals issued today.
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. 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.
Changes to the methodology will apply to future redress payments only. 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.
FCA executive director of strategy and competition Christopher Woolard says: “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.”
Hymans Robertson head of corporate consulting Jon Hatchett says: “The FCA is looking at this issue because the numbers cashing out of DB pensions have soared since freedom and choice. Twice as many people transferred in the first year following the introduction of pension freedoms. Momentum is increasing due to record high transfer values making DB transfers more attractive – both to members and to scammers. Many of those transferring won’t have had appropriate support and advice which is worrying. Whether individuals stay or leave the scheme, there are huge risks members could make poor decisions with a life-changing and life-long impact.
“If DB scheme members are unsupported and make the wrong choices this could come back to bite trustees and employers. Evidence suggests most employees expect support with the complex ‘at retirement’ decisions. Trustees of DB schemes have a moral duty to protect members. They work hard to safeguard the valuable benefits promised to members. Ensuring individuals make the right choice when making one of the biggest financial decisions of their life is a natural extension of trustee duties. Members staying or transferring must do so on an informed basis and with access to quality advice.
“Indeed if schemes facilitate the process rather than leaving members to fend for themselves, this could save around £4bn of advice costs across UK DB whilst ensuring the advice is of good quality. That’s because facilitating the advice process can save around £4,000 per scheme member in advisory fees.
“Putting in place a preferred advisor for a scheme can bring dramatic efficiencies and cost savings. Retail customers can pay £5,000 plus for DB transfer advice, yet the average cost for a scheme-appointed adviser is more like £1,000. Multiplied by the 1 million DB members likely to explore their options over the next 10-20 years, this leads to a potential saving of c£4bn across UK DB, and at the same time ensures members make decisions on an informed basis with access to quality advice. Our clients’ experience points to the fact that finding an adviser combined with high advice costs prevent members from engaging in their options.”
