The FCA has published finalised guidance for those who get a complaint about advice to transfer all or part of a defined benefit pension into a personal pension.
The regulator started a consultation in March to update how redress is calculated for unsuitable pension transfers. The guidance and consultation follow a review by PwC of the existing method of working out redress
In the guidance document published today, the FCA affirms that the “basic objective of redress” is to put the customer into the position they would have been in had the unsuitable advice not been given.
The regulator says that, where possible, the redress calculation should reflect the features of the customer’s original DB scheme. It says this could include, for example, different tranches of pension increase rates and deferred revaluation rates.
The guidance says it should be considered how far to take into account any adjustments to the benefits the customer would have been eligible for under the DB pension scheme.
It says this could include, for example, reflecting a state pension offset or the scheme entering the Pension Protection Fund.
The guidance says if it is not possible to pay the redress into the customer’s personal pension by “augmentation” then it should be paid in a lump sum.
The guidance document says that should be adjusted according to the client’s tax position.
It adds: “Firms should be mindful of where the redress methodology already factors in tax, such as when considering pension commencement lump sums. A customer should not be left in a worse position at the point of being redressed as a result of the redress either being used to augment their personal pension or being paid as a lump sum.”
The guidance says: “In calculating the redress amount, respondents should also take into account the customer’s wider circumstances so that they are not disadvantaged by receiving the redress payment.”
The document explains that the guidance applies to any complaint received after 3 August 2016. It also applies to a complaint received before 3 August 2016 but not settled in full before that date.
The guidance includes information relating to retail price index inflation, consumer price index inflation, the consumer’s retirement age, the pre-retirement discount rate, pension increases in payment, personal pension charges, and the post-retirement discount rate.
The changes made to the methodology include revising the inflation rate assumption to reflect the Bank of England’s 40-year inflation forward curve gilt yields and removing the pre-retirement lifestyling rate from the calculation.
It says adviser charges as well as fund charges should be taken into account as well as pension charges up to a maximum of 0.75 per cent.
It also includes guidance on mortality and spousal age differences, saying that when the actual age of the spouse is known it should be taken into account.
It also covers enhanced transfer values saying: “Where a cash enhancement was paid in addition to the transfer value, the cash enhancement should be rolled up from the date of payment to the calculation date using 50 per cent of the return on the FTSE 100 Total Return Index.”
It adds: “This should be net of personal pension charges for each year, as determined previously, and the figure added to the value of the consumer’s personal pension policy.”