The Financial Conduct Authority (FCA) has proposed to update the methodology used to calculate redress payments for unsuitable advice given on defined benefit (DB) transfers, saying the system needed to become more 'appropriate'.
In a consultation paper out on 10 March the regulator proposed a number of changes to the methodology currently used, which, it said, would typically mean claimants would be better off.
The changes include updating the inflation rates used in calculations and updating mortality assumptions.
They will apply to future redress payments only and to consumers who were given unsuitable advice to transfer out of a DB pension scheme but have not yet accepted compensation.
The FCA first announced in August 2016 it planned to review the methodology following concerns there were more appropriate ways to calculate redress, allowing consumers to better replicate the benefits they had held in their DB scheme.
Executive director of strategy and competition Christopher Woolard 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."
In particular, the FCA proposed:
- Updating the inflation rates used to better reflect likely inflation;
- Updating the pre-retirement discount rate so that it acknowledges the Pension Protection Fund;
- 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;
- Updating these assumptions on a regular basis to reflect the fact that markets are often volatile.
The regulator said a review was necessary because there had been a number of significant changes to the pensions landscape since 2004, including the introduction of ‘pensions freedoms'.
The FCA also made clear it did not deem this approach to be 'retrospective regulation', despite better outcomes for consumers being anticipated.
"We are conscious of the need to avoid retrospective regulation by applying a more demanding standard or interpretation of the rules after the event, with the benefit of hindsight, but do not consider that updating this methodology involves retrospective regulation," it said.
"This is because we are seeking to replicate the benefits of a DB scheme in payments made today, where we can see more clearly what a consumer gave up."
In the meantime, consumers unhappy with the advice they received to transfer out of their DB scheme can continue to complain to firms while the consultation is ongoing, the FCA said.
However, it warned where redress was 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.
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