There may be a limit on how much a consumer can ordinarily save into their workplace pension scheme. One way consumers can increase the amount they save for their retirement is by using an additional voluntary contribution (AVC) scheme, buying “added years” in a defined benefit scheme, or taking out a free-standing additional voluntary contribution (FSAVC) scheme.
Types of complaints we see
Most of the complaints we receive about AVCs are where a consumer believes you have unsuitably advised them to:
- take out an FSAVC instead of joining the “in-house” AVC scheme offered by their employer
- invest in the employer’s money purchase AVC instead of buying added years within the main scheme
We also see complaints about the administration, sales and marketing of FSAVCs. We can consider this type of complaint if it’s been done by an FCA-regulated business. Otherwise, we may need to refer the complaint to the Pensions Ombudsman.
What we look at
We’ll take into account the circumstances of the case to come to a fair and reasonable outcome – including taking into account any relevant rules, regulations, legislation and good industry practice at the time of the problem that led to the complaint.
We’ll also consider whether the sale was by a “tied” representative of a product provider, or an independent financial adviser.
Rules relating to the sales of AVCs and FSAVCs
The rules and requirements relating to AVCs and FSAVCs have varied over time.
April 1988 to May 1996
From 29 April 1988 to May 1996, rules from the following two regulators applied:
- Life Assurance and Unit Trust Regulatory Organisation (LAUTRO)
- Financial Intermediaries, Managers and Brokers Regulatory Association (FIMBRA)
The LAUTRO Code of Conduct stated that life assurance company representatives should:
- have regard to the consumer's financial position generally and to any rights they may have under an occupational pension scheme
- give the consumer all information relevant to their dealings with the representative in question
So, if a life assurance company representative was involved in advising the consumer about a pension arrangement, they should have:
- pointed out that AVCs were available
- explained that AVCs were likely to provide better value for money
- recommended considering the AVC
The FIMBRA rules required a FIMBRA-regulated independent financial adviser to:
- know its client
- not make a recommendation unless it believed, having carried out reasonable care in forming its belief, that no transaction in any other such investment (of which it ought reasonably to be aware) would be likely to secure the objectives of the consumer more advantageously
- take reasonable care to include in any recommendation to a person, other than a professional investor, sufficient information to provide that person with an adequate and reasonable basis for deciding whether to accept the recommendation
Under FIMBRA rules, an independent financial adviser (IFA) should therefore have actively investigated an AVC if it was available and recommended it if it was better for the consumer.
May 1996 onwards
In 1994, the Personal Investment Authority (PIA) took over from LAUTRO and FIMBRA, adopting their rules for sales of AVCs and FSAVCs.
In May 1996, the PIA issued Regulatory Update 20, which said that tied advisers should:
- draw the consumer's attention to the AVC plan
- discuss the generic differences between the FSAVC and AVC
- direct the consumer to his employer or the OPS for more information on the AVC options
It also said that IFAs should discuss the specific differences between AVC and FSAVC options with the consumer, including the:
- difference in charges and expenses between the FSAVC and AVC
- choice on investments
- availability of added years and the number of years that could be purchased
- degree of personal control and privacy
- age at which benefits could be taken
- degree of portability on changing jobs
The consumer believes you should have advised them to take out an employer-linked money purchase AVC instead of an FSAVC
If you recommended an FSAVC after 29 April 1988, but before the PIA issued its updates, we’ll take into account the LAUTRO and FIMBRA requirements.
This means that if an AVC was available to a consumer, you should have referred to its availability and recommended looking into it. If you are an IFA you should have looked into the AVC on behalf of the consumer and recommended it if it was the better option.
But if, as an IFA, you recommended an FSAVC to a consumer, we won’t necessarily agree with the consumer’s complaint. We may decide an FSAVC was suitable for them.
This might be the case where, for example:
- the AVC alternative only offered a building society account investment, and the consumer wanted to have an equity-linked investment
- there’s clear evidence the consumer preferred a particular investment (for example, an ethical fund) that wasn’t available via the in-house AVC arrangement – and the consumer accepted this would involve higher charges than those for the AVC
IFAs sometimes present other perceived advantages of FSAVC arrangements – for example, that they’re confidential, flexible or portable.
In these cases, we’ll look carefully at whether the consumer did get an advantage from taking out the FSAVC you recommended. We’ll take into account that:
- confidentiality, flexibility and portability are unlikely to be important considerations for most consumers
- confidentiality is not in any case strictly maintained by an FSAVC, as the pension provider must always notify the consumer's workplace pension scheme that its scheme member has an FSAVC
- the charging structures of FSAVCs often make them inflexible, particularly in relation to certain types of AVC, because the consumer may receive poor value if they discontinue the policy early on
- although a consumer can continue an FSAVC in any new employment, the new employer may offer an AVC on advantageous terms – and certain types of AVC don’t impose punitive terms if a consumer has to discontinue one because of a change in employment
In all complaints where a consumer believes that you, as an IFA, should have advised them to take out a money purchase AVC instead of an FSAVC, we’ll look at whether you:
- clearly explained the advantages and disadvantages of FSAVCs and AVCs
- weighed the perceived advantages of the FSAVC against the clear material disadvantage of any higher charges
We consider cost to be the principal consideration in most purchases of AVC schemes. If an FSAVC doesn’t have any significant advantages that outweigh an AVC with lower charges, we may decide that the consumer would have taken out an AVC instead if you had given them suitable advice.
The consumer believes you should have advised them to buy an 'added years' AVC instead of taking out a money purchase AVC or an FSAVC
Under ‘added years’ arrangements, a consumer pays contributions to buy a number of extra years in an AVC scheme. The benefits of added years AVCs are linked to the consumer’s final – or alternative, such as average over a number of years - salary. This link is particularly beneficial for scheme members who remain in service and see their salary increasing substantially. Benefits for death in service, ill health and redundancy may also be better.
However, added years AVCs may represent poor value for early leavers and those who don’t see their salary rising substantially. They’re also relatively expensive and can sometimes be inflexible.
With this type of complaint, we’ll look at the consumer's circumstances at the time you gave them advice. We’ll consider whether they would have bought added years if you’d given them suitable advice. Factors include:
- future job prospects
- likely earnings increases
- attitude to risk
For example, we might decide that the consumer was less likely to benefit from added years if:
- they’re relatively young, since they’re more likely to be an early leaver
- they’d moved jobs regularly in the past – and/or had skills that were in high demand – since they’re more likely to be an early leaver
- they looked likely to have relatively low salary increases (based on their potential for career progression and earnings increases at the time of the advice)
- evidence shows they wanted to take a higher risk for greater potential reward when investing, since money purchase AVCs and FSAVCs can involve more risk than added years AVCs
If a consumer has remained in a job and enjoyed good salary increases, it doesn’t necessarily mean you should have advised them to buy added years.
As well as the potential expense and inflexibility of an added years AVC scheme, we’ll also consider whether it offered any other relevant benefits for the consumer, such as widow’s and dependants’ benefits.
- age – younger consumers are more likely to be early leavers, so we might decide they were less likely to benefit from added years AVCs
- future job prospects– if the consumer had moved jobs regularly in the past – and/or had skills that were in demand – then we might decide they were a potential early leaver and were less likely to benefit from added years AVCs
- likely earnings increases– we’ll assess the consumer's potential for career progression and earnings increases at the time of the advice. If the consumer looked likely to have relatively low salary increases, we might decide they were less likely to benefit from added years AVCs
- attitude to risk– money purchase AVCs and FSAVCs can involve more risk than added years AVCs. This means they may not be suitable for a consumer who usually adopts a risk-averse approach to investing. We’ll look at the evidence available from the time of the advice about the consumer's attitude to risk.
Where there is no clear evidence, we will consider what the most likely result would have been, had their attitude to risk been investigated at the time of the advice. This may involve looking at what other investments the consumer had at that time.
The cost of buying an added year is fixed by the scheme actuary. They will have wanted to reduce the chance of a strain on the scheme - and so they may have selected a conservative set of assumptions to fix the "added years" costs.
This means that on realistic assumptions, the benefits arising from the money-purchase approach would be greater at retirement. But this is not guaranteed - and recent experience has been disappointing. As the annuity rates available at retirement have become more expensive, this has meant that the benefits on retirement from an AVC or FSAVC policy have been disappointing.
Following concerns about pension mis-selling, the Financial Services Authority (FSA) required financial businesses to carry out a limited review of FSAVC policies sold between 29 April 1988 and 15 August 1999.
The main aim was to review the FSAVC policies of consumers who might have lost access to – or the opportunity to access – matched or subsidised contributions from their employer to an AVC scheme.
If matched or subsidised contributions were never an option, consumers could still request a review on a ‘charges only basis’ – to compare the charges between their FSAVC and any other AVC schemes their employed offered.
The deadline for requesting a review was 31 December 2001. Financial businesses should have carried out any reviews before 30 June 2002.
The consumer should normally have awaited the outcome of this review before making a specific complaint. Any complaint about the review should have been made first to the financial business in question.
Consumers now can still make a specific complaint about an FSAVC, but they can’t request a review under the FSAVC Review as the deadline has passed.
Handling a complaint like this
Your customer will need to make a complaint to you first so that you have the opportunity to put things right. If the consumer is unhappy with your decision, or you don't respond to them within the time limits, they can come to us.
Find out more about how to resolve a complaint.
Putting things right
When we uphold a consumer's complaint, we'll tell you what you need to do to put things right.
The consumer believes you should have advised them to take out a money purchase AVC instead of an FSAVC
Where we uphold a consumer's complaint, we’ll generally tell you to pay them compensation in accordance with guidance from the FSAVC Review. We may use a different basis where we believe the guidance doesn’t adequately compensate for the consumer’s loss – for example, where the calculation includes ongoing charges beyond January 2005 (this is explained below). We may also decide that no loss has actually occurred.
The FSAVC Review guidance intended to compensate consumers for losses relating to:
- losing access to matched contributions or subsidised benefits from the employer
- paying higher charges for an FSAVC scheme instead of an AVC scheme
It wasn’t intended to compensate for losses arising solely from poor investment returns in the FSAVC funds.
The guidance says to calculate the loss by using the same benchmark to model the growth of both the AVC and FSAVC funds – each net of their specific charges – and working out the difference in value. A choice of two benchmarks is available:
- building society returns – for situations where the consumer would have joined a deposit-based AVC
- weighted average returns on the CAPS ‘mixed with property’ index – for situations where the consumer would have joined an investment-based AVC
As data for the CAPS ‘mixed with property’ index isn’t available for periods after 1 January 2005, you should use the FTSE UK Private Investor Growth Total Return Index to provide data after 1 January 2005. We’ve concluded that this index provides the closest match to the CAPS index.
We’ll also take into account:
- the date on which the consumer joined (or could reasonably have been expected to have joined) the AVC
- if the consumer can’t now join the AVC
Where the consumer hasn’t yet drawn benefits from the FSAVC and is not able to transfer it into an in-house AVC arrangement, we’ll make provision for the future difference in charges they may incur.
The FSAVC Review allowed businesses the opportunity to show that their customer didn’t suffer any loss in situations where the investment growth of the FSAVC exceeded that of the AVC, after deducting charges. We’ll only be able to take this into account if you provide evidence of this before we reach a determination on the case. If we’ve upheld your customer’s complaint, we’ll normally tell you to use one of the two benchmarks from the FSAVC Review.
Where appropriate, we may also tell you to pay your customer compensation for distress, inconvenience or other non-financial loss.
Find out more about how we award compensation.
The consumer believes you should advised them to buy an 'added years' AVC instead of taking out a money purchase AVC or an FSAVC
Where we uphold a consumer's complaint, you’ll need to value the lost added years. For the set of assumptions to use, see our guidance on compensation for pension mis-sale cases that fall outside of the Pensions Review.
Where appropriate, we may also tell you to pay the consumer compensation for distress, inconvenience or other non-financial loss.
If we decide that the consumer wouldn’t have bought added years, we may still decide that you should have advised them to take out an employer-linked money purchase AVC instead of an FSAVC. See our guidance above on compensation for this type of complaint.
You can visit the National Archives website to view FSAVC review bulletins and review model guidance in archived web pages.
Businesses and consumer advisers can contact our technical desk on 020 7964 1400 for general information on how the ombudsman might look at a particular complaint, or for guidance on our rules and how we work. Or you can search our database of published ombudsman's decisions.
Our work gives us an insight into how complaints arise and how they might be avoided in the future. Find out more about the ways we share our knowledge and experience.