Higher discount rates = lower compensation?
Long term interest rates have, in recent months, increased significantly. The 15-year, 5 year forward gilt rate from the start of 2022 until the end of June 2022 has increased by almost 1.5%. The increase is due to the market pricing-in higher interest rates over the next 5 years.
Redress calculations according to FG17/9 are sensitive to gilt rates as they attempt to replicate annuity pricing for the individual at retirement. If gilt rates increase that means annuity values at retirement would have fallen i.e. the capital value of scheme benefits would be lower, as shown in the table below (that is for a hypothetical deferred pension of £1000 payable at NRA 60 & 65).
Increasing interest rates i.e. long term gilt rates does mean that the (projected) retirement pot will be lower but that does not mean the compensation will be lower. The purpose of redress is to put the customer back into the position he or she would be if they retained their former scheme benefits i.e. purchasing an annuity at retirement to replicate the former scheme benefits.
As an alternative mechanism for redress, it would be perfectly feasible for the regulator to design a redress scheme where the firm responsible for the original transfer would be required to provide a annuity to the individual at retirement instead of cash compensation (either direct or augmenting an existing flexible pension arrangement) – that would be an equivalent position from a redress perspective.
|Capital values||04-Jan-22||01-Jul-22||% change|
|NRA 60 – 5 years to retirement||£47,822.50||£38,221.29||20.10%|
|NRA 65 – 5 years to retirement||£37,542.94||£31,508.85||16.10%|
|Post-retirement discount rate||04-Jan-22||01-Jul-22||change|
|NRA 60 – 5 years to retirement||1.20%||2.60%||1.40%|
|NRA 65 – 5 years to retirement||1.25%||2.65%||1.40%|