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Pension redress: How much might a defined benefit pension transfer complaint cost me?

The FCA prescribes the way redress in relation to defined benefit (DB) pensions transfer is calculated. The amount of redress required varies significantly from case to case.

As a result, when you receive a complaint it can be hard to know what your financial exposure would be if the complaint were upheld.

Read on to learn crucial insights on how to navigate this as Sarah Abraham, Head of Pension Redress Services at First Actuarial shares five helpful tips to help you understand how large redress might be. Plus, find out how First Actuarial are partnering with Jencap to offer discounted rates for pension redress calculations.

1. Understand recent movements in redress

Redress has fallen significantly over the past few years – with typical redress for someone who transferred out in 2016 falling by around 80%.

This is because the redress calculation looks at the cost of purchasing an annuity to replace the ceded DB pension. As such, recent falls in annuity prices translate to lower redress.

Modelling shows typical redress for a 50 year old who had a pension of £10,000 pa in 2015, transferred out in 2016 and invested the transfer proceeds in a mixed portfolio of assets comprising UK and overseas equity and corporate bonds.

The substantial falls in redress shown in the chart above mean that if you’re using the redress you paid on historic complaints as a guide for future redress payment you may be being too pessimistic.

However, you should be wary of directly reading off a graph like this to assess what redress may be on a particular piece of transfer advice.

In particular, just because redress has fallen substantially in recent years, it doesn’t automatically mean that the redress on your case will be negligible.

Redress is highly sensitive to the particular circumstances of the case – and we still see cases where the compensation payment is more than the transfer value effected.

2. Check when the advice to transfer was provided

As a rough rule of thumb, redress will be higher if the transfer value was paid some time ago.

This is because until 2022 (when interest rates started to rise sharply) the general trend was for transfer values offered by occupational schemes to gradually become more generous over time.

The more generous the transfer value, the lower redress will be.

One thing to be aware of is that the First Actuarial Redress Index above shows movements in redress on transfer value advice that was given following the introduction of Pension Freedoms legislation. It is unlikely to be representative of redress on transfers effected significantly before then.

Indeed, redress on advice given in the 90s and early 2000s is likely to be significantly higher than that applying to post pensions freedoms advice. This is because until 2005, UK pension schemes operated under the “minimum funding requirement (MFR)” regulatory framework, under which transfer values were considerably lower than they would be today.

It’s also important to note that while transfer values have generally become more generous, the amount offered by occupational schemes is typically strongly correlated with the yield on government bonds at the date of transfer. As a result, short-term fluctuations in gilt yields around the time of the transfer can affect the level of redress.

So, while you can use the date of the transfer advice as a guide to how high redress may be, further analysis is needed to fully understand the potential redress on your case.

3. Identify the critical yield determined as part of the transfer advice

As noted above, the generosity of the transfer value paid significantly affects the redress that may be due.

Trustees of occupational pension schemes are able to choose the actuarial assumptions that are used to calculate transfer values. This means that two consumers transferring out of their DB pension scheme on the same day, and giving up identical DB pensions, could receive vastly different transfer value payments.

So, looking at the date of transfer alone will not give a clear picture of the potential redress. You’ll need to take additional steps to understand the generosity of the transfer value paid.

Where analysis of the critical yield was carried out as part of the transfer advice, it may be possible to identify whether the transfer value was particularly generous (corresponding to a low critical yield) or mean (corresponding to a high critical yield).

This sort of technique can also be useful if you’re looking at a book of pensions transfer advice and trying to establish the cases where redress is most likely to be material.

4. Consider how the transfer proceeds have been invested

Another key consideration when estimating potential redress is the return generated on the defined contribution (DC) pot since the transfer was effected.

All else being equal, the higher the return, the lower redress will be.

As revealed in the chart below, the asset allocation of the DC pension is particularly important, especially at the moment due to the massive variation in returns on different asset classes over the past few years.

Source: FTSE and MSCI

If the consumer transferred out post Pension Freedoms and invested the transfer proceeds primarily in fixed-interest assets, it is likely that redress will be high.

Similarly, if you are still advising the customer you may be able to obtain a fund value and estimate the return actually achieved on the transfer proceeds. However, this can be more complicated if funds have been paid into, or out of, the DC pension.

5. Commission an indicative assessment of redress

The tips above may enable you to identify cases where there is likely to be material redress, or low redress as follows:’

If you want to put a figure on the potential redress associated with a complaint about DB transfer advice, it may be worth commissioning an indicative loss assessment from First Actuarial – who offer discounted rates for clients of Jencap Partners.

Once an indicative calculation has been carried out it’s often relatively quick and cheap to finalise it if you do find that you have to pay redress.

As part of our service, First Actuarial will review the case file to ensure that there is enough information available to provide you with a meaningful estimate of redress before we start work.

Bear in mind that even if you’ve not received a complaint, it can be helpful to understand the risk of redress on the DB transfer advice you’ve given.

This might be useful if you’re preparing for an acquisition or want to understand the potential implications of the FCA’s polluter pays proposals on your business.

If this is the case, First Actuarial can carry out modelling on your book to determine your overall potential exposure to pensions transfer redress and identify particular pockets of risk within the book.

Get in touch

This guest post was bought to you by Sarah Abraham, Head of Pension Redress Services at First Actuarial – widely considered to be a trusted source of independent expertise on pension policy.

If you’d like to find out more about how First Actuarial could help you, email Sarah at sarah.abraham@firstactuarial.co.uk or call send an enquiry through our website.

Alternatively, speak to Tim or John at Jencap Partners and we’ll be happy to introduce you. Email mail@jencap.partners, or call 029 2000 2325.