FCA consults on changes to redress framework for pension transfer advice

The FCA has opened a consultation (CP22/15) into redress calculations for customers who suffer financial loss following a DB to DC pension transfer. 

On the heels of a report from the Public Accounts Committee - which criticised the FCA for being "consistently behind the curve" and failing to protect British Steel Pension Scheme members from poor quality financial advice - the consultation sets out the regulator's plans to fine-tune the redress calculation methodology, and consolidate its existing patchwork of legacy rules and guidance into DISP (the FCA Handbook dispute resolution sourcebook).

Calculation clarity

Following a review of the calculation methodology carried out by Deloitte for the FCA, the consultation proposes a series of improvements to ensure the methodology guidance reflects actuarial best practice; is responsive to members' circumstances; and reduces - as far as possible - the impact of market volatility on calculations. 

Behind the "responsiveness" aim are several proposed changes to calculation assumptions, including:

• the proportion married or in a civil partnership at retirement (using a probability matrix based on term to retirement)
• retirement age (introducing a "rebuttable presumption")
• adviser and product charges (moving to a "reasonable level" of charges approach - based on a fixed percentage of the DC fund value - 50bps for ongoing adviser charges and 75bps for product charges).

Turning to communications with members, the FCA separately proposes that firms inform the member of the calculation, setting out its key elements and assumptions. Naturally, the explanation should be clear, fair and not misleading, and satisfy the more prescriptive requirements set out in the consultation.

A predilection for augmentation

The overriding principle of redress - that members are put, so far as possible, back in the position they would have been in if they had received compliant advice and remained in their DB scheme - remains unchanged.

The consultation also underscores the FCA's preference for as much of any redress as possible to be paid directly into the member's DC pension. The regulator's view is that augmentation is most likely to be in members' best interests "and should be the default option for redress payments"; notwithstanding this, the FCA says that cash lump sums may be more appropriate where such augmentation, for example, tips the member over annual or lifetime allowance thresholds.

What next

The consultation will close on 20 September 2022. Any changes to the methodology will be confirmed in a subsequent policy statement in the winter.