skip tocontent

ombudsman news

issue 5

May 2001

redress for mis-sold pension contracts - a briefing note

We last considered the subject of redress for pension contracts in the December 1999 issue of the Personal Investment Authority Ombudsman Bureau's News from the Ombudsman Bureau. Since then, we have had further discussions with the Inland Revenue. Following organisational changes at the Inland Revenue, since April 2001 the Pensions Scheme Office (PSO) and the Financial Intermediaries and Claims Office (FICO) have ceased to exist. From that date, these offices became part of the new Inland Revenue Savings, Pensions, Share Schemes business stream (IR SPSS).

This further briefing note does not alter the view published in December 1999 but seeks to clarify the issues that have arisen since, and our approach. We hope it will provide firms with additional clarification and allow all parties to resolve complaints more efficiently.

pension review complaints

The redress methods available for personal pension mis-selling are strictly governed by the regulator's pension review guidance and we require firms to act in accordance with that guidance. Reinstatement into the consumer's former occupational pension scheme is the preferred option for redress, as set out in the regulator's guidance. However, reinstatement is entirely at the discretion of the occupational scheme's trustees, so is not always possible. In such cases, the only other option under the guidance is augmentation. This requires a payment of money into the consumer's personal pension fund to boost its value - so that the estimated retirement benefits from the personal pension policy match, as closely as possible, the predicted retirement benefits from the former occupational pension scheme.

When a firm completes a loss assessment in accordance with the guidance and either makes an appropriate offer of redress or finds the advice has not resulted in financial loss, then in line with our Terms of Reference (amended on 4 November 2000) we will endorse the redress offered to the consumer or make no award if there is no loss. In the very rare situation where we do not consider the guidance addresses the particular circumstances of the case, we will decide the compensation on the specific facts and circumstances of the complaint.

Following the changes to the PIA Ombudsman's Terms of Reference referred to above, the ombudsman is no longer able to make an award to an investor where a PIA-regulated firm has conducted a review of the investor's pension arrangements in accordance with the regulator's published guidance.

‘If an investor is aware of a shortfall and makes a complaint, the ombudsman could make an award where there is prima facie evidence of loss. The burden is upon the complainant to provide such evidence. In addition, the ombudsman would have to be satisfied that the regulated firm had either departed from the guidance in conducting its review or had otherwise miscalculated the investor's losses.'

‘It is accepted that many investors do not have the means to assess whether a PIA-regulated firm has calculated the loss correctly. However, a full analysis of the calculations would have to be conducted by an actuary or similarly qualified individual. Where an investor obtains such assistance, the ombudsman will only make an award for costs if it can be shown that the firm's calculations are deficient.'

pension mis-sales - in relation to non-pension review complaints

We have been asked to clarify whether it is possible to rescind pension contracts. The ability to do this applies only to personal pension plans, retirement annuity contracts and Free Standing Additional Voluntary Contribution (FSAVC) contracts sold by product providers. It is not possible to rescind contracts relating to occupational pension schemes. A different body - the Pensions Ombudsman - normally deals with complaints about occupational schemes, but where such complaints come to us, we will continue to decide compensation on the individual facts and circumstances of each case.

pension mortgages

We have also been asked whether it is possible to rescind personal pension contracts where they were sold in conjunction with a mortgage. It has been agreed with the Inland Revenue that although personal pensions and mortgages are stand-alone products, the reality is that some investors are advised to take out a pension policy to use as a repayment vehicle for an interest-only mortgage. Where we consider such advice to have been unsuitable, investors should not be made to retain a long-term contract which does not meet their requirements.

is Inland Revenue approval required-

In cases where we direct that the appropriate remedy is to rescind the pension contract, the product provider does not need to seek approval from the IR SPSS. The product provider should pay the appropriate redress to the investor and then make a full report to the IR SPSS in Bootle so that any outstanding tax relief can be recovered. However, product providers should advise self-employed investors who have obtained tax relief, and employees who have benefited from higher rate tax relief, to notify their tax office of the situation.

sales by independent financial advisers (IFAs)

The rescinding of unsuitable pension contracts applies only to cases where a product provider makes the sale, as the product provider is party to the contract. We cannot order the pension contract to be rescinded where the sale was made by an IFA (who is not party to the contract) and in such cases we will continue to apply the existing forms of redress, as follows:

unsuitable sales - not mortgage-related

For cases which are not mortgage-related, but where the pension contract is unsuitable, the appropriate compensation payable is normally calculated as the sum equal to the net premiums paid into the plan, plus interest for loss of use of the money, less the current transfer value of the pension plan. The pension plan itself remains in existence, unaltered.

unsuitable sales - mortgage-related

For cases that are mortgage-related, where the pension contract is unsuitable, the appropriate compensation is normally calculated as the sum equal to the total amount of capital reduction that would have been achieved had the investor taken out an equivalent repayment mortgage, less 25% of the pension plan's current transfer value. The pension plan itself remains in existence, unaltered. However, we will decide the compensation on the individual facts and circumstances of each complaint, particularly where the pension contract cannot continue because of affordability problems or where a related pension review issue remains outstanding.


all queries about our approach to redress for mis-sold pensions, or other pension issues, should be sent to:

Alan Larner, Manager - Pension Team, Investment Division Financial Ombudsman Service South Quay Plaza 183 Marsh Wall London E14 9SR
phone 020 7964 0318

Where necessary, we will liaise with the IR SPSS so please do not direct your query to them.

Walter Merricks, chief ombudsman

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.