The FCA announced in a 3 March statement (Retail Prices Index changes and DB pension transfer redress | FCA) that it would be amending its Finalised Guidance (FG17/9: Guidance for firms on how to calculate redress for unsuitable defined benefit pension transfers | FCA) on how to calculate redress for unsuitable defined benefit (“DB”) pension transfers. We comment below on why this change is required and what firms should do with recent calculations.
What is the FCA changing and why?
Government changes to the way in which the Retail Price Index (RPI) is to be calculated, which were announced in the November 2020 Spending Review and are due to take effect from February 2030. This requires changes to the Finalised Guidance, because otherwise some consumers may not receive the correct amount of redress for unsuitable DB transfers as the assumed difference between RPI and CPI would be too large. As a result, without the change, consumers who transferred out of DB pension schemes that are uprated annually in line with the CPI would be unfairly impacted.
The FCA does not intend to consult on the change as it would delay the correct redress being paid. The change will be backdated to 25 November 2020 but in practice the expectation is that it will be applied to calculations carried out from 1 January 2021.
The Finalised Guidance is part of the FCA’s range of work on avoiding and addressing unsuitable DB transfers. In June 2020, the FCA published proposals for pension transfer advice and a number of new rules and guidance came into effect in October. More can be read about this in an article accessible here. Since then, the FCA has been keen to demonstrate that they will take action to protect consumers from unsuitable DB transfer advice and ensure sufficient redress. In a previous article (accessible here), we commented on an injunction obtained by the FCA to protect £7m of assets to compensate victims of poor pension transfer advice.
The statement issued by the FCA last week is the latest in the focus on protecting consumers from unsuitable DB transfer advice and for ensuring there is suitable redress. As the economic fallout from the Covid-19 crisis may result in increased transfer requests from DB schemes, we agree that sufficient advice and redress is just as important now than ever.
What should firms do with regard to recent calculations?
If a firm believes that the calculation of a pension transfer redress offer on or after 1 January 2021 unduly disadvantaged a customer, they should revisit the calculation. They should do so regardless of whether the offer has already been settled, even if in ‘full and final settlement’.
Redress should put the disadvantaged consumer back in the position they would have been in but for the unsuitable advice being given. In other words, the redress calculation should reflect the features of the customer’s original DB scheme. If the calculation used under the Finalised Guidance failed to achieve this outcome, the FCA recommends that firms should revisit it.
If a customer would have been eligible for CPI-uprated benefits had they not transferred out, and the redress calculation did not reflect CPI due to the RPI adjustment discussed above, the calculation should be revisited. If firms are unsure on how to do this due to new guidance not yet published, the customer should be informed of this, and there is an acknowledgement that the eight-week limit on responding to complaints may overrun (in which case the customer should be informed of the revised response date).
This commentary was written by George Bridge and Suzanne Padmore
We intend to update the CPI adjustment by mid-March 2021 and will do so without prior consultation. Consulting on this technical change would delay the correct amount of redress paid to consumers.