The FCA estimate more complaints to come
We warned of this a year ago. Philippa and I have both written to Nikhil Rathi Chief Exec FCA this week, urging unusual and decisive steps in the face of a wild change in the discount rate due to volatile inflation and gilt yields, further making FOS/FSCS compensation a lottery. https://t.co/HzQ7elX62R
— Rush (@exRAF_Al) July 28, 2022
There has never been a better time to buy an annuity since the arrival of quantitative easing 14 years ago. As Rishi Sunak pointed out in a recent debate, rates could rise to 7% to keep inflation under control. The prospect of increasing interest rates has made buying a pension cheaper. This is why DB schemes have seen their deficits shrink. They actually have less in the collective pot, but the pot does not have to stretch so far, pensions are cheap again.
But cheap pensions will lead to cheap compensation for advisers under the proposed BSPS redress scheme. The compensation is based on the cost of buying people back into a pension and if that cost goes down , so does the compensation. This is how it works.
Al may call FOS and FSCS compensation a “lottery” but it is no more a lottery than the growth on a steelworker’s SIPP or the CETV that funded the SIPP. All are subject to market forces beyond the control of fund managers, advisers and SIPP-holders.
The year of the annuity?
My comment on twitter , was in response to Al Cunningham’s observation.
Client in drawdown, looking back over 12 months:
Fund value, including withdrawals down 10%.
Level of income they could buy with an annuity up 15%!Is this the year when drawdown clients use rising interest rates to lock into an annuity?
— Alistair Cunningham (@Cunningham_UK) July 28, 2022
Less in the pot, but cheaper to buy pensions? It’s the same paradox that’s driven pension schemes into surplus
And Al is thinking what DB scheme managers are thinking. The window for swapping the risk of a fluctuating pot for the certainty of an income for life is open.
Why steelworkers shouldn’t be deferring claims.
There has been some talk on the steelworker’s Facebook pages about the lottery of FOS and FSCS compensation claims. Undoubtedly, the rules for compensation aren’t properly understood and injustices have been done. But that should not stop steelworkers claiming now.
Indeed the FCA are encouraging steelworkers to make their claims if they feel they were badly advised.
My original reaction to Al’s tweet was to assume he would be pushing claimants to hold back till the “discount rate bubble burst”
But Al’s tweeted again to clarify and his point is that Steelworkers should be compensated at the point of claim, not many months after – when the claim reaches the top of the queue.
Not ‘gaming’ at all. My point is that if the delays have been caused by JR and internal FCA procedure (NAO report refers), why should someone who may have been paid out months ago, when discount rates were not in the bubble that the Treasury tells us they are, be penalised now? pic.twitter.com/Q3utZIqeKv
— Rush (@exRAF_Al) July 29, 2022
So Al and Philippa Hann aren’t speculating that annuity rates are likely to fall soon and that compensation claims will be higher if they do. That would mean holding back a claim till the annuity rate has spiked and this would be “gaming” to me.
Conspiracy theorists may feel that the FCA – and even some advisers – are encouraging speedy claims to meet the annuity spike and minimise the overall compensation bill, but calling the end to high inflation/higher interest rates is a mug’s game. Besides there are other reasons for action, not least the time that’s elapsed since the bulk of BSPS transfers took place. We cannot make the timing of a claim a game of chicken based on a study of the gilts curve.
The Discount Rates – the rip-tide of financial markets.
The factors that govern the valuation of pension schemes are unseen put powerful – like rip-tides. They were what made CETVs for steelworkers almost double in early 2017 and they are now working in the opposite direction.
As discount rates rise, CETVs are falling. Were steelworkers who have remained in BSPS to apply for a transfer value, it is unlikely they would get the deal that steelworkers got in Time to Choose (even with the deduction from CETVs levied by the Trustees because BSPS was then in deficit).
The arguments of Stuart Fowler and others are based on those historic CETVs offering exceptional value – the arguments are compelling on purely financial grounds. The steelworkers who are being compensated are being compensated for bad advice, not bad transfer values. But they must accept that they must take rough with smooth. Those seeking compensation must accept that the scale of the compensation is subject to the same rules as the scale of CETVs.
It would be well to let matters play out, despite the lottery this all seems. There is a fundamental consistency in the valuation process which we must respect, even if we do not fully understand it.
And on the upside, many SIPPs – boosted by compensation, could now convert to much better pensions – if used to buy an annuity.
