A recent policy statement from the Financial Conduct Authority has changed the redress process for pension transfers gone wrong in more ways than some might think.
Following a consultation in 2022, the FCA published "Policy Statement 22/13: Calculating redress for non-compliant pension transfer advice" in November 2022. The new requirements took effect in April 2023.
Much of the discussion around PS22/13 to date has centred on changes to the assumptions adopted within redress calculations.
However, there are also new requirements for the redress process itself, including specific instructions on how firms should engage with consumers.
Overview of the new requirements
The previous redress guidance, FG17/9, was relatively concise and primarily aimed at actuaries performing redress calculations.
In contrast, PS22/13 is a comprehensive document that covers each stage of the redress process. And because it has been codified into the FCA handbook in Dispute Resolution Appendix 4, "Handling pension transfer redress calculations", IFA firms will need to be familiar and comply with it.
The content of DISP Appendix 4 broadly covers the following areas:
- application – setting out the circumstances in which it applies;
- the mechanism for paying redress – confirming that redress must be offered as cash, with an option for consumers to request redress via augmentation;
- gathering the information needed to perform a redress calculation – setting out the process that IFAs are expected to follow and what to do if data is not available;
- actuarial methodology for determining redress – providing a detailed explanation of the way in which redress must be calculated;
- the derivation of the actuarial assumptions used in the redress calculation – explaining precisely how the assumptions must be determined; and
- communicating the redress offer – outlining the information that must be given to consumers when they receive their offer of redress.
It therefore incorporates some content that will be best understood by actuaries, and some that will be accessible to a wider audience.
It is worth noting that the revisions to the redress guidance were carried out in parallel with the development of the British Steel consumer redress scheme (the rules of which are set out in the separate PS22/14).
Some of the provisions of PS22/13 are likely to have been influenced by the FCA’s experience with British Steel calculations.
Application of the new requirements
DISP Appendix 4 applies to any complaint received by an advising firm after April 1 2023, as well as any complaint received before that date that was not settled before April 1 2023.
The content is intended for unsuitable defined benefit transfer advice, but some of it is also relevant to other pensions redress calculations – such as where individuals have lost out on the accrual of benefits in a DB pension scheme as a result of the advice they received.
The mechanism for paying redress
During the consultation process for PS22/13 and PS22/14, there was widespread debate about the most appropriate way for redress to be paid.
Many IFAs initially took the view that if it was concluded that transferring out was not in an individual’s best interests, then they should be put back in the position of receiving a guaranteed income for life.
This approach would have required consumers to give up their personal pension, along with the redress payment itself, in lieu of an annuity purchase.
Conversely, concerns were expressed that requiring redress to be paid by means of a top-up to an existing personal pension (an augmentation) would introduce excessive complexity, particularly in ensuring that annual allowance limits were not inadvertently breached.
The FCA has responded by:
- Enabling annuity purchase as a means of redress – but only subject to the agreement of the consumer.
- Requiring that redress must be offered as a lump sum payment.
- Requiring that firms must offer to provide redress by full or partial augmentation if the consumer requests this.
In practice, because many consumers are likely to prefer a cash compensation payment, this will remain the most common route for implementing redress.
