The FCA released CP22/15: pension transfer redress consultation on 2 August 2022. This is the (overdue) four-year review of the pension redress methodology FG17/9.
The FCA propose to retain the fundamental basis of redress i.e. a lump sum redress payment into the flexible pension, representing the difference between the original scheme benefits and flexible benefits, although they have considered alternative approaches e.g. purchase of a (deferred) annuity to replicate the original DB scheme benefits. However, there are several proposed amendments (change in assumptions and/or methodology) which we highlight below together with giving our general view on how it will impact redress when changing these parameters in isolation:
Pre-retirement Discount Rate
There is a proposed change of the inflation component from RPI to CPI, use of average dividend yield over last 12 months, and an increase in assumed growth of dividends from 0.5% to 1% which implies that the discount rate will be lower.
Increase in expected redress
Post-retirement Discount Rate including PCLS
There is no material change in this parameter but there is some clarification on technical aspects of the parameter construction.
No change in expected redress
Inflation & Inflation Linked
The CPI rate is currently adjusted from the RPI using a table prescribed by the FCA (yearly updates). They wish to move to a dynamic approach using a method to derive CPI based on the observation that CPI (CPIH) and RPI will be the same value from 2030. The proposal is to also introduce an Inflation Linked Premium (“IRP”) which is a deduction to the pre-retirement inflation rate only. The most significant change is the introduction of a Black Scholes framework for pension increases that are subject to a cap and/or floor.
Unknown change in expected redress
Demographic
Current use of PxA08 tables published by the Institute & Faculty of Actuaries (IFoA) Continuous Mortality to be replaced with PxA16 tables. Default assumption of 85% married in retirement to be replaced by a table with weighting based on term to retirement.
Increase in expected redress
Charges
This is a clarification on how product and advisor charges should be incorporated but the most significant change is the adoption of a recommended charge of 0.5% pa for advisor charges (over and above product charges)
Unknown change in expected redress
Calculation Date & Frequency of Updates
The recommendation is to move from quarterly updates to more frequent updates e.g. monthly or more frequent than monthly. It is recognised that there may be a delay between calculation date and settlement date in payments made to the complainant, so they are suggesting adding interest on the amounts based on the pre-retirement rate for prospective loss and post-retirement rate for actual loss cases.
Increase in expected redress
Other
There are some clarifications and minor amendments on Earning growth, Enhanced Transfer Values and Free Standing Additional Voluntary Contribution (“FSAVC”) policy.
Unknown change in expected redress
GMP Equalisation
The proposal is that the redress methodology could include a principles-based requirement such as the requirement to “consider the impact of GMP equalisation” however they also note that any amount from the ‘second-order’ effect will likely be small it may be considered by the FCA to ignore this impact.
Unknown change in expected redress
Actual Loss
There is a detailed section on how to treat actual loss cases – this level of detail is absent in the current issue of FG17/9. There are some clarifications on how to treat PCLS, early / late factors and historical payments in actual loss cases, but the most significant recommendation is the assumed retirement age. This is consistent with how the Financial Ombudsman Service (“FOS”) would determine compensation for an actual loss case i.e. to consider the counter-factual to determine what the likely course of action would have been in the former member had not transferred to a flexible arrangement.
Increase in expected redress
SERPS adjustment
The proposal confirms that there is no impact if the transfer is from a DB scheme with S148 GMP revaluation or a potential reduction in redress if the transfer was from a DB scheme with a fixed rate GMP revaluation. There is a further recommendation that the redress methodology states that no SERPS adjustment is made in redress calculations for consumers who have transferred or opted-out post 6 April 2016.
Unknown change in expected redress
