Review of Redress Guidance FG17/9
The FCA announced on 1 September 2021 that they would be starting a periodic review of the redress guidance FG17/9 by the end of 2021. The timing of the review is broadly consistent with that anticipated at the time that the guidance was first published in October 2017.
The FCA have confirmed that firms should continue to operate in line with the current version of the guidance, albeit they have provided clarification in two areas alongside their 1 September announcement:
Allowance for charges in the receiving arrangement
FG17/9 requires that redress calculations incorporate an allowance for the future charges that will arise on the proceeds of a defined benefit transfer. Product charges can be capped at 0.75% pa but any charges being made for financial advice must be excluded from the cap and allowed for separately.
The treatment of advisor charges is a particular area of concern for the FCA since it emerged last year that some advisors have been restricting their charges to offset reduced advice charges with higher product charges.
The FCA has issued various clarifications with regards to the treatment of charges, in particular to confirm that charges for advice should be assumed to continue in full, at the current level until Normal Retirement Age; and that advice charges should be allowed for even if they are not being paid to the advising firm. Furthermore, the FCA have flagged that firms should not withdraw or change the cost of the advice service without good reason.
Allowing for the customer’s wider circumstances
The FCA have noted that where redress is being offered as cash (rather than via top up of a pension arrangement), the payment of a potentially significant sum could impact on other benefits that a customer is receiving. Firms will therefore need to consider carefully the implications of redress on means tested benefits and tax.
In practice, making allowance for a reduction in means tested benefits arising from a redress payment can be complicated, not least because it can be difficult to establish how the benefits will be affected. As such, offering redress by means of a contribution to a pension arrangement may be a pragmatic solution.
It seems likely that the updated guidance will address these two areas. Other aspects which might be considered are:
- The way in which the CPI assumption is determined – at present CPI is set as RPI less a term dependent differential which allows the two measures of inflation to converge from 2030. However, the way in which the guidance is structured means that a revised set of term dependent differentials will need to be issued each year. OAC anticipate that the guidance will be amended slightly to avoid the need for new guidance every year.
- The guidance could be expanded to provide better commentary on how redress calculations should be undertaken when the consumer has already reached the retirement age of the ceding scheme. The treatment of such cases is not addressed in the current guidance and, in OAC’s view, this is leading to a lack of consistency in approach across the industry.
- The guidance could be expanded to provide clearer narrative on the extent to which the assumed retirement age from the defined benefit scheme may be affected by the consumer having drawn benefits from their personal pension. Typically making allowance for the consumer to have retired early or late from the ceding scheme will impact on the magnitude of redress as a result of the early/late retirement terms offered by the scheme.
OAC anticipate that the review will incorporate a consultation process – differing from the approach taken in March 2021 where new guidance was introduced without consultation and with retrospective application. It is therefore reasonable to expect that the review may take several months and that revised guidance may not be available until Q1 or even Q2 2022.
The FCA has had another busy period carrying out its work on defined benefit transfers.
It was announced in October that the National Audit Office will be reviewing the FCA’s handling of unsuitable transfers out of the British Steel Pension Scheme (BSPS) and this continues to be an area of focus for the FCA.
Drop-in sessions for former BSPS members were held by the FCA, FOS and FSCS during September, helping individuals to understand if they could have been poorly advised - and at least 36 firms are now reviewing their advice as a result of the FCA’s intervention on transfers from the British Steel Pension Scheme (BSPS).
However, many steelworkers are still waiting to be offered compensation and the FCA appear to have deferred the possibility of implementing a bespoke redress scheme which might have accelerated the redress process.
Understandably, former members of the British Steel Pension Scheme need reassurance that any offer made is fair. This may mean that even once offers have been made, individuals are reluctant to accept them. The position is exacerbated by the substantially varying levels of redress between different investors which in part reflects the changes to the benefit structure which arose as part of the move to the New British Steel Pension Scheme
In August the FSCS updated their website to provide additional narrative about the way that defined benefit transfer redress is determined, including a section to explain why compensation may differ for people who transferred from the same ceding scheme. This is heavily focused on the BSPS, presumably reflecting the general level of anxiety from steelworkers and their advisors. Whether their explanation will be sufficient to reassure investors that their redress offer is fair remains to be seen.
Aside from the BSPS, the FCA has noted in its submission to the Work and Pensions Select Committee’s consultation on pensions freedoms, that it has instructed 60 firms to carry out past business reviews in relation to defined benefit transfer advice.
The FCA also continue to proactively engage with individuals who have received advice to transfer out. Over the summer letters were issued to over 2,500 individuals who were advised to transfer out by firms who are no longer operating, encouraging them to raise complaints with either the FSCS or the liquidator of the advising firm. A further 950 such letters were sent in October.
The number of firms still advising on defined benefit transfer is reported to have fallen from around 3,000 in 2018 to 1,200 in 2021 – with the FCA’s intervention, alongside the ban on contingent charging being likely drivers for the fall.
As we have previously noted, this poses issues for both members of defined benefit schemes who could have benefited by transferring out, and for scheme sponsors and trustees who have in the past seen reductions in their pensions risk as a result of transfers out.
As occupational schemes take steps to equalise GMPs, many will be considering the merits of GMP conversion, in which the value of the GMP is calculated, the GMP is removed and a non GMP pension of equivalent value replaces it. This process enables occupational schemes to reduce the complexity of their administration. Furthermore, it is possible to restructure the form of the pension accrued before April 1997 alongside the GMP conversion exercise. This can be beneficial to occupational schemes where it allows a fixed or nil increasing pension, to replace an inflation linked pension – thus reducing the exposure of the occupational scheme to inflation risk.
The impact of GMP conversion, and the potential change to escalation on pre April 1997 pension, will normally be to reduce the cost of securing benefits with an insurance company. As the assumptions required under redress guidance FG17/9 are set to broadly replicate the cost of annuity purchase, it might be reasonable to expect that making allowance for a GMP conversion exercise would reduce redress. However, the extent to which allowance can practically be made for GMP conversion within redress calculations needs further consideration.
OAC are currently considering possible approaches to enable fair redress to be determined where the ceding scheme is known to be implementing GMP conversion
Other issues to watch for
Claims manager fees
A policy statement is due this quarter in relation to the FCA proposals to introduce a price cap on the fees that Claims Management Companies (CMCs) charge their customers. The caps would restrict the charges to 15%-30% of the redress received by the investor, with the higher cap applying where redress is over £50,000.
Protection for members from transfer scams
The Pensions Act 2021 incorporates provisions for transfer rights to be refused unless certain conditions are met. A consultation on the conditions was carried out earlier this year, and new regulations come into effect from the end of November. The regulations mean that virtually all pensions transfers will need to be assessed by the Trustees and their advisors for red flags which might signal a pensions scam.
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