On 28 November 2022, the FCA issued Policy Statement PS 22/13 "Calculating redress for non-compliant pension transfer advice". This formalises many of the proposals contained in the consultation paper CP 22/15 which was released on 2 August 2022.
Key points from the finalised Policy Statement are summarised below and OAC will provide more detailed analysis during December. Note that the FCA also issued Policy Statement PS 22/14 "Consumer redress scheme for unsuitable advice to transfer out of the British Steel Pension Scheme" and OAC will also provide an analysis of that for our clients with a book of BSPS transfers.
The FCA's key success measures include reducing the number of complaints from consumers about the redress offer received.
In OAC’s view, there are likely to continue to be complaints arising. In particular, one of the key challenges from consumers is typically due to the impact of changes to market conditions and PS 22/13 is unlikely to change this. We saw during 2022 that changes to market conditions resulted in falls to redress offers during the year - BSPS transferees who received redress offers later in the year often saw lower offers compared to colleagues who received redress offers in an earlier period. This movement in redress reflects the disconnect between investments typically held in personal pensions and the basis in the redress guidance, which reflects the cost of purchasing annuities.
PS 22/13 comes into force for calculations from 1 April 2023. This should give sufficient time for firms to update their processes and models. The methodology will be consolidated as new rules and guidance in the FCA’s DISP sourcebook, formalising the approach to be used and also allowing more "assertive supervision or enforcement action" where required.
Guidance from the FCA remains that consumers should be made aware of the change to the methodology and to explain that they have the option to wait for the implementation of the changes before being provided with an offer of redress. This may result in a backlog of cases being calculated as at 1 April 2023, potentially resulting in longer timescales in finalising redress calculations.
Note that the FCA committed to a review of the redress guidance every 4 years, and the next interim review is anticipated in 2027, with a full review in 2031.
Quarterly updates to assumptions
The FCA has retained quarterly updates to market conditions.
The proposal in the Consultation Paper was to move to monthly updates but, in line with OAC’s response to the Consultation, this was agreed to present too many challenges in practice.
Firms will be required to issue calculations to the consumer within 3 months of the valuation date - i.e. within the quarter during which the calculation is carried out. Firms will also be required to add “additional compensation” for the period between the valuation date and the payment date, using the pre-retirement or post-retirement discount rate as appropriate.
Payment of redress
There was a proposal in CP 22/15 that redress be paid into consumers' pension plans as an augmentation as far as possible. OAC challenged this on the grounds of complexity, including the potential tax implications due to the Annual Allowance and Lifetime Allowance.
We are pleased to see that the FCA have amended their proposal to require calculation as a lump sum, although also show an alternative offer of pension plan augmentation. This is largely in line with the reports OAC currently provide to our clients.
If you would like to discuss, please get in touch with your regular OAC contact.