We may uphold a complaint where a consumer has:
- transferred from or opted-out/didn’t join a defined benefit or ‘final salary’ occupational pension scheme (OPS), or
- should have bought ‘added years’ in that scheme with their additional contributions
Calculating appropriate compensation in these situations will depend on a number of factors, including the current value of the pension they were advised to take out instead of membership of the final salary scheme, and whether there is a difference in what they contributed to their pension, compared with the final salary scheme.
And for cases which need a historic calculation re-run (because for example one or more of the crucial aspects of the calculation were wrong), it would also depend on what the regulator said the business should assume when calculating compensation at that time.
The aim of compensation is always to put the consumer back in the position they’d be in now if they hadn’t started the alternative pension arrangement. But because of the rules around pensions and pension contributions, this isn’t always straightforward.
Where possible, we’d look at whether the missing years of service could be reinstated in the defined benefit scheme, but the scheme may not allow this. And even if the consumer is still working for the same employer, they may not be able to join the same scheme that they originally lost membership in.
The Pensions and FSAVC Reviews – 1994-2003
In 1994, the industry regulator (at the time, the Securities and Investment Board - and subsequently the Financial Services Authority) established a review of sales of personal pension policies which involved opt-outs, non-joiners or transfers from an Occupational Pension Scheme (OPS), between 29 April 1988 and 30 June 1994 – the “Pension Review”.
And in 2000, the regulator established a review of sales of certain Free Standing Additional Voluntary Contribution (FSAVC) policies taken out between 29 April 1988 and 15 August 1999. This is known as the FSAVC Review - see our related information on additional voluntary contributions for more detail.
The methodology for calculating compensation for the loss of guaranteed benefits is included within the Pension Review guidance, beginning with SIB’s Statement of Policy on 'Pension transfers and Opt-outs' issued in October 1994.
Periodic guidance expanding on this Statement of Policy was issued by SIB and FSA throughout the period 1994-2003. The FSA later said this methodology should also be used when calculating compensation for the loss of “added years” in FSAVC cases.
The methodology included assumptions to be used when calculating compensation for these complaints, such as on future investment growth and annuity rates. These were revised regularly from 1994 to April 2003. The assumptions were published whilst the FSA was the regulator and set out in each Pensions Review Bulletin, these are now only available as archive content via The National Archives website.
In general, the assumptions to be used were those relevant to the time that the compensation was offered and paid to the consumer. This included where mistakes were made in the original calculations - a recalculation would usually be run using the assumptions applying at the same date as the original calculation.
As most pension and FSAVC reviews had been completed by April 2003, the FSA stopped updating these assumptions.
Assumptions commissioned by the Financial Ombudsman Service – 2005-2016
The Financial Ombudsman Service continued to receive complaints after April 2003 about pension transfers, opt-outs/non-joiners and “added years” which weren’t part of the Pensions or FSAVC Reviews. We commissioned a firm of independent actuaries to provide these assumptions, which were usually updated on an annual basis. These too are now only available in archived content via the National Archives website.
FCA consultation on revised methodology to calculate compensation - 2016
On 3 August 2016, the FCA announced it would be launching a consultation on redress for consumers who were given unsuitable advice to transfer out of defined benefit pension schemes. In March 2017, the FCA set out its proposals. The consultation ended in June 2017 and the FCA’s finalised guidance - FG17/9 - was released in October 2017.
The FCA said in this guidance that ‘Where a respondent upholds a complaint concerning a non-joiner, opt-out or FSAVC case, the respondent may use this guidance as a basis for calculating appropriate redress, to the extent that it is appropriate to do so and subject to the particular circumstances of the case.’
We’re likely to consider that it’s appropriate to use the new FCA methodology for non-joiner, opt-out or “added years” cases, in addition to pension transfers.
As a result, for all such cases we’d expect redress to now be based on the FCA’s new methodology. This methodology also sets out the process for deriving the relevant assumptions it’s necessary for you to make on the date you carry out your calculation.
The new methodology applies to complaints received by a firm after 3 August 2016 and for complaints received before 3 August 2016 but not settled on a full and final basis before that date.
These calculations can be complex. There’s software available to help you work it out, but many businesses choose to use a firm of actuaries to do the calculation on their behalf. Professional membership bodies like PIMFA or the Institute and Faculty of Actuaries might be able to help you with suggestions on who to use.
Once the calculation’s been done, you’ll need to pay the consumer any resulting loss. You’ll also need to send a copy of the calculation to the customer, set out in a way that’s easy for them to understand.