Under its terms of reference, the PIA Ombudsman Bureau contains a test case procedure under which it may, at a firm’s request, discontinue the investigation of a complaint in favour of court proceedings if:

• the case involves an issue which may have important consequences for the business of firms generally or an important or novel point of law; and
• the firm undertakes to pay the complainants’ legal costs.

There has only been one of these test cases to date. However, the PIA Ombudsman Bureau has now received a second test case notice, which relates to a complaint arising from the pension review. The investor transferred his deferred pension benefits from a former employer’s final salary pension scheme to a private pension scheme. The private pension was with a mutual company. This has since demutualised, making a ‘windfall’ payment to all policyholders.

The transfer was inappropriate and there is a dispute about the calculation of the amount the company should add to the pension policy as compensation for this.

When we consider such complaints, we are bound by the guidance issued by the PIA, whose Regulatory Update 33, issued in May 1997 states:

“PIA is receiving a number of questions about whether the value of any shares which an investor may receive in consequence of demutualisation should be taken into account in loss or redress calculations. By way of clarification, we confirm that we regard the share value as the price paid by the demutualising entity for the exchange of membership rights in favour of the shareholder rights. The actual value in the hands of the investor is entirely collateral to the value of whatever investment contract he or she may have. It follows, therefore, that the financial impact of demutualisation should be ignored in calculations of loss or redress.”

In the firm’s view, the value of the demutualisation benefits received by the investor should be included in the calculation of loss and redress.

The PIA Ombudsman Bureau’s policy on demutualisation benefits, in relation both to Pensions Review and other cases, was discussed in the PIA Ombudsman Bureau’s News from the Ombudsman in December 1999. PIA-regulated firms will therefore be aware that we follow two different practices. Where the case concerns the Pensions Review, we are required to follow the Pension Review guidance (PIA Regulatory Update 33).

Our present understanding is that the firm wishes to obtain a declaration from the court in relation to the guidance, rather than to challenge our application of the guidance. In view of the comments made by the PIA Ombudsman in 1999 and the scale of the pension review, we accept that this issue is a matter of importance to firms.

The Ombudsman has issued a decision accepting that the arguments made by the firm are, on the face of it, reasonable, and confirming that we will cease investigating the complaint. There does, however, remain the question of what should be done in relation to all similar cases. Where a firm requests that the calculation of redress is deferred until the court has decided this test case, we will not conclude our investigation.