PS22/13: Implementation results

PS22/13: Implementation results 

The FCA have updated the rules in the policy statement PS22/13 around the determination of redress for non-compliant pension transfer advice.  There are changes in the methodology, from the current approach to determine redress, which come into force 1 April 2023.  This note highlights the difference between the current methodology (FG17/9) and the proposed methodology (PS22/13). 

Under the new methodology the FCA expects actuarial oversight of redress calculations.  The rule is that a firm must use an actuary, or an approach approved by an actuary, when undertaking calculations i.e. use actuarial software which is compliant with technical actuarial standards to undertake the relevant calculations (by actuarial standards the FCA mean Financial Reporting Council Technical Actuarial Standard 100).  

The FCA expects firms to update the economic assumptions they use in redress calculations quarterly. In the consultation they proposed that firms update the economic assumptions no less frequently than monthly – however, in the final rules they have maintained the current FG17/9 position of quarterly updates and, in addition, acted to prevent more frequent updating.  That is, the valuation date must be the first day of the quarter (for calculations undertaken within that quarter) with the redress calculation date falling within the same quarter as the flexible pension valuation date (with an interest adjustment for any lag in these dates).  This is a missed opportunity to move to a more frequent valuation to ensure that redress calculations properly address current market conditions.  We do not understand the justification for what the regulator is now ruling given their clearly stated intention in the consultation to allow for the current market conditions – which was a reasonable change in our view. 

There is clarification on future advisor and product charges which will be set at 0.5% pa and 0.75% pa respectively (independent of the charges in the current arrangement).  Where the client is not currently in an advised arrangement, or where they would need to switch advice firm to get future ongoing advice services, the FCA are suggesting further compensation of 2.4% of the current personal pension plan (with a cap and floor at £3,000 and £1,000 respectively). 

The FCA have also clarified how redress should be paid to clients.  In the consultation, and in the previous methodology, redress should normally be paid directly into the client’s existing personal pension plan by augmentation – however due to tax issues (e.g. Annual Allowance, Lifetime Allowance limits etc) and other “non tax” issues firms must in future always offer the consumer redress as a cash lump sum payment (taking into account the client’s tax and personal circumstances e.g. means-tested benefits etc.) but may also offer redress as augmentation if the cash option was not viable.  

There are also a number of technical changes made to the methodology as a result of the feedback received in the consultation.  We have illustrated the changes in two charts shown below based on a random selection of an actual portfolio of British Pension Scheme transfers.  The first chart shows the percentage changes for members that are “assumed to be married” between PS22/13 calculation and a FG17/9 calculation – the second chart shows the percentage changes for members that are “assumed to be single” between PS22/13 calculation and a FG17/9 calculation. 

Congruent CalculationsTM subscribers can view link for more information

Subscribers to our Congruent CalculationsTM platform are now able to calculate redress using both FG17/9 and PS22/13 methodologies from the 3rd January 2023