The FCA has revised its approach to restitution for those who have been wrongfully advised to transfer out of good quality pension schemes or have been sold inappropriate products such as FSAVCs. The paper is called “Calculating redress for non-compliant
pension transfer advice” and filed as CP22/15.
This massive paper lands when it will get minimum attention, right at the start of August. With a consultation closure date of September 20th, the FCA is presenting a slam dunk which is unlikely to see much amendment. I will be responding on a number of matters and will publish my proposed amendments on this blog.
Included in the 192 page document are the details for the BSPS redress scheme which will follow the new guidelines which will be consolidated into the FCA conduct rules. The guidance is published within CP22/15 , suggesting that it is unlikely to be much amended.
It replaces rules established in the 1990s . The changes largely reflect advances in actuarial thinking and the paper mainly adopts recommendations from consultancy Deloittes.
Deloittes’ modelling of the changes to the actuarial process to calculate a claim shows that the new method can increase a transfer by up to f 8.9% or reduce one by up to 5.3%. The FCA points out that “most of the changes in Deloitte’s modelling are more modest than this”. It would be interesting to know who winners and losers are.
My feeling , having read through all 192 pages , is that pension transfers from occupational DB schemes have been more trouble than the transfer’s worth. The length and complexity of this document is notice of a 35 year policy failure.
So what’s new?
There are two major changes in the redress process, illustrated below.
The main news for people seeking redress is that
- Valuation factors will be updated every month not every quarter, meaning that the all-important pre and post retirement discount rates will be adjusted 12 times a year.
- Once an offer has been made, it must be updated in line with the discount rates between the valuation and payment dates, this looks a potentially lengthy period.
Both changes look to me , to be in the interests of consumers.
But for steelworkers there is further complexity – more delay
For the Steelworkers , the timing of the “calculation date” has become a matter of concern. The discount rates for pre-retirement have more than doubled since Christmas, a function of rising inflation , interest rates and gilt yields. For younger steelworkers, this has meant some compensation calculations issued by advisers and FSCS have been withdrawn and re-issued, often at half the previous offer.
The new timescales (above) mean that the compensation once offered will increase in line with the steelworkers status (pre or post retirement). However, there is still ample scope for calculations to vary, according to the valuation factors applied. As Financial Advisers can wait 3 months to issue the offer, the point of the monthly cycle seems lost.
Linking compensation to investment returns , while actuarially plausible, makes little sense to those who have deliberately put off taking the offer of compensation till the terms of the redress scheme are published. The worry for steelworkers is that they will find the terms of their compensation being governed by the lottery of discount rates they know nothing about. There are plenty of opportunities for smart advisers here to game the process, especially when they are close to a new valuation date.
Rebuttable Presumption
The FCA’s proposals also introduce a new phrase to the conversation “Rebuttable Presumption”. Not being a lawyer, I had to look it up.
It seems that advisers are going to have to take an educated guess, based on what they know a client has been up to, as to when they would have taken their DB pension , had they not transferred. This is open to gaming in my opinion. The right answer to the adviser may not be the right answer to the customer. It is the basis of step 2 of what the adviser has to do in calculating redress.
Reinstatement, augmentation and cash pay-outs.
In olden days , DB schemes were prepared to have those who transferred out – back – subject to proper restitution. But reinstatement, despite calls from the PIMFA and other IFA groups, is not going to happen, that horse has bolted.
Instead, the FCA are keen for compensation to “augment” personal pensions into which transfers were paid. This is provided there is headroom. As the average BSPS transfer is reckoned to be £60,000, that’s unlikely for most lower earners who may well have triggered the Money Purchase Annual Allowance (£4,000 max) , or not be able to use the full £40,000 allowance due to lower earning than £40k and existing contributions.
Indeed , some lower earning claimants may find the compensation , when paid as cash, could seriously disrupt universal credit payments. The FCA are aware of this and to their credit, flagging these issues with advisers.
Many steelworkers , who I know would prefer compensation to be paid in cash, will be cursing me for saying this, but it really is in everyone’s interest that compensation is paid into personal pensions if it can be.
If compensation is paid as cash – the principle of returning former members to where they were pre-transfer, will be so diluted – as to be quite lost. Ironically, advisers who have been orchestrating crystallisation of the personal pension’s payment process, may have inadvertently triggered another claim – this time for “restricting augmentation”. Let’s hope not.
Bespoke BSPS redress
The first bit of good news for steelworkers is that calculation will generally be against New BSPS or the PPF or even PPF+ if Pension Insurance Corporation(PIC) enhance PPF benefits when – as expected – they buy out old BSPS
If you follow that, then you are more a pension expert than 99% of the population, but it’s the way steelworkers can get improved compensation , or get shafted so they will have to be on their toes or have good advocates.
IF it can be proved that a steelworker had made a predilection for PPF or BSPS2 at the Time to Choose, then that predilection will determine the compensation. I suspect that very few advisers will find that proof on file.
Nevertheless , expect some steelworkers to find themselves with compensation based on the scheme that gives them least. Claimants need to be wary.
Changes in FSCS compensation where advisers are no longer in place
The second big change for some BSPS claimants is the general rule on redress for advice. The cost of advice is reckoned to be 0.5% of the CETV (whether more or less has been charged) , but those who were previously barred from getting an advisory payment (having lost their advisor) will be able to claim the 0.5% and special compensation of up to £3,000, as the cost of initial advice. This will be determined at 2.4% of the funds under advice capped at £3,000 and collared at £1,000. This is a good deal and I would suggest a direct result of lobbying by Al Rush.
This will come as a relief to some who no advisor and yet to claim, but little relief to those whose claims have been downgraded by FSCS, because no advice was being paid for. (see Al Rush’s letter to the FCA CEO below).
Any steelworker paying more than 0.5% pa of funds for advice should be asking their adviser why. The FCA has (probably very deliberately) created a new benchmark which may in course become a cap.
The flat 0.5% is most likely to disadvantage those with small pots – for whom a higher percentage charge may be in place for advice. Unless charges decrease, such people will only get partial compensation for advice. And of course, people who have been ripped off by advisers over fees , may well find 0.5% scant comfort.
When will the BSPS redress scheme be in place?
There is likely to be around £71m paid out through the new redress scheme , on top of £70m already paid by advisers or FSCS. The question is material.
The finalisation of BSPS redress is awaiting not just the consultation and the FCA’s response, but the terms of PIC’s offer to old BSPS members. September marks the 5th anniversary of BSPS’ Time to Choose, but sadly not the end of the saga for steelworkers due compensation.
For the wider group of claimants for poor pension transfer advice, this paper is long overdue. While redress is no longer likely to be reinstatement to the original DB scheme (as happened in the 1990s). It is clear the FCA will be requiring advisers to use their skills to get as much of the cash back into the DC pension as possible. But the FCA admits that current taxation rules mean that many (including most BSPS claimants) will see parts or all of claims taxed as income and paid into bank accounts
For many people, the 192 page document is proof, if proof was needed, that the unlocking of Defined Benefit schemes via CETVs has been a monumental policy disaster for 35 years. The FCA has gone some way to improving redress, but it remains a buggers mess.
Letter from Al Rush to Nikhil Rathi.
