Under FG17/9, the actual advice charges being incurred by the consumer had to be allowed for in the calculation. There was scope for this to lead to some debate between advising firms and consumers, particularly where advice fees were being paid to a newly appointed adviser rather than the firm liable for the redress payment.
In practice, the change to this assumption will only affect individuals who have not yet reached their retirement age – and will be particularly marked for younger people, for whom there is an extended term over which future charges are expected to apply.
3. The age at which the consumer is assumed to retire
As under FG17/9, the default assumption within PS22/13 is that individuals would have retired from their DB pension scheme at the earliest date they could do so without incurring a reduction to their benefits and without consent from the sponsoring employer.
However, under PS22/13 this assumption is rebuttable, giving firms the opportunity to make allowance for an individual to have taken early retirement if they can support their alternative approach.
Varying the assumed retirement age can have a material impact on redress. Therefore, while not explicitly specified within the FCA handbook, it may be desirable to agree this assumption with the consumer before the redress calculation is performed.
This will prevent either side from being seen to be cherry picking the assumption once redress has been calculated. The FCA notes in PS22/13 that this approach is acceptable and that it would represent good practice.
Communicating the redress offer
The FCA expects communications to be fair, clear and not misleading.
They have laid down a number of specific points that must be communicated as part of the redress offer. These fall under the following broad headings:
Specific requirements include (but are not limited to): | |
Explanation of the assumptions and approach used to determine redress | A statement that redress has been calculated in accordance with the FCA’s rules and guidance using an approach approved by an actuary. An explanation that redress reflects market conditions at the valuation date and might be different if measured at a different date. Disclosure of information and assumptions used, including the assumed retirement date. An invitation for the consumer to review their current investment strategy to ensure that it is in line with the assumed investment return used in the redress calculation. |
| |
Explanation of the redress calculation itself | Separate identification of the primary and secondary compensation sums. An explanation that if the redress offer is accepted, the additional compensation sum will be allowed for. |
Explanation of the terms and conditions of the redress offer | A request that the consumer reviews the assumptions used in the calculation and raises any queries about them with the advising firm. An explanation of how to accept or reject the offer and the process for resolving any complaints about the redress calculation or the redress offer. |
Warnings associated with paying redress as a cash lump sum | A statement that if the redress payment is not invested prudently, the consumer risks missing out on the retirement income that the redress is meant to provide. Provision of information about trusted sources of free advice and guidance on making investment decisions such as Pension Wise, MoneyHelper and the FCA’s ScamSmart guidance. |
The FCA has also prepared a set of frequently asked questions for consumers, to which it encourages firms to direct their customers.
Summary
In the main, the requirements of PS22/13 should improve consistency in the calculation and communication of redress.
However, firms will need to make sure they are familiar with the required processes, and in particular that they comply with the data gathering and disclosure requirements.
While the magnitude of redress calculated under PS22/13 is not expected to vary substantially from that calculated under FG17/9, firms that are carrying out a large number of redress calculations should be mindful of the higher operational costs that may be incurred as a result of the requirement for actuarial oversight, and to ensure compliance with the requirements of the FCA handbook.
Sarah Abraham leads the redress team at First Actuarial
