Pension switching redress
In its 2008 thematic work on the standard of advice given to pension customers who were advised to ‘switch’ pension product after April 2006 the FSA identified 4 principal areas of failure, or unsuitable outcome, for the investor.
Where failures are identified, the FSA direct that firms take remedial action, which includes providing redress where necessary.
The measurement of potential, or actual, financial loss and the calculation of redress will of necessity be dependant upon the nature and number of the failure(s) or ‘unsuitable
outcome(s)’. The mix of unsuitable outcomes will also impact upon the requirement for calculations, the ultimate cost of redress, and the manner of effecting appropriate redress.
Unsuitable outcomes
1. The customer has been switched to a pension that is more expensive than their existing
one(s) or a stakeholder pension. May involve:
- consideration of the ceding scheme(s) investment charges and exit penalties;
- consideration of the receiving scheme(s) initial, ongoing and future exit charges;
- consideration of an alternative, otherwise suitable scheme for eg stakeholder or other benchmark charges; and
- consideration of charges of an alternative scheme for receipt of redress.
2. The customer has lost benefits in the pension switch without good reason. May involve:
- loss of guaranteed annuity rates;
- loss of guaranteed fund on retirement;
- loss of higher tax free cash from S32 policy or EPP; and
- loss of death benefits.
3. The customer has switched into a pension that does not match their recorded attitude to risk and personal circumstances. May involve:
- consideration of the ceding scheme fund(s) performance net of investment charges as would have applied;
- consideration of the receiving scheme fund(s) performance net of actual investment charges;
- identification of an alternative suitable risk profile fund performance for comparison; and
- consideration of investment charges on a replacement scheme to which funds may be switched for the future and for the receipt of redress.
4. The customer has switched into a pension where there is a need for ongoing investment reviews but this was not explained, offered, or put into place.
The question here is what action may reasonably have been taken, and when, and how to measure the impact of any such action as compared to the present situation.
It is likely that there will be cases where there is interaction and cross effect between different outcomes.
Issues for the calculation of redress
- Valuation of the impact of differing and sometimes multiple investment charges on given fund(s) assuming equal underlying investment performance over given period(s) of time.
- Valuation of the impact of differing investment charges on differing levels of investment performance over given period(s) of time.
- Will the fund(s) be switched to lower cost / more suitable risk profile for the future?
- Income having been taken (drawdown).
- Valuation of lost guaranteed annuity terms.
- Valuation of lost fund guarantee.
- Valuation of lost tax free cash entitlement.
- Redress for actual loss – valuation of past loss or gain, and future loss.
- Redress for prospective loss – paid direct to the policy by the firm or as cash to investor for onward investment.
- Tax implications of cash redress payments.
- Lifetime and annual allowance implications of redress.
- Selection of retirement age for redress calculation.
Redress can be costly, and a disputed redress offer even costlier. It pays to get it right first time and this is where OAC can help. Contact us to find out more about OAC’s outsourcing solutions and redress calculations.
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