With the Financial Conduct Authority’s proposed “polluter pays” framework, firms will have to plan carefully when it comes to pension transfer redress, which can often be difficult, according to one actuary.
Speaking at the Pensions Playpen session this week (February 20), Sarah Abraham, head of pension redress services at First Actuarial, outlined why and how IFAs should plan for pensions transfer redress.
The FCA’s “polluter pays” model will hit more than 5,500 firms and investment intermediaries would be affected under the proposals.
More specifically, firms which are in scope are “those that mainly provide adviceand retail investment products and are exempt from the UK’s interpretation of Mifid”.
Additionally, those under the asset retention rules will see personal investment firms set aside capital so they can cover compensation costs.
Pension Playpen said with the British Steel scheme still rumbling on, and the “polluter pays” proposals to digest, pensions transfer redress should be firmly on the agenda for firms that have written defined benefit transfer advice.
However, understanding how pensions transfer redress works can be challenging.
Abraham explained how pensions transfer redress is calculated and why it poses a significant risk for IFAs.
“Pensions transfers are getting attention because the FCA isn't massively keen on them; their starting point tends to be people shouldn't be transferring out and people are better off in a DB scheme,” she said.
“Secondly, we know that pension transfers - both DB and DC - can result in quite high redress payments and thus, if you're having to hold reserves, you are more likely to hold more if you've written DB transfer advice in particular.”
She explained firms need to take this seriously and will need to identify and quantify potential redress liabilities.
They will need to outline those that fall into the category of either unresolved complaints that have already been received, or respective where redress may be needed in the future.
“The [latter] is a much harder thing to define and what we find is different firms interpret that in different ways,” she said.
“Then you quantify the redress for that and estimate how much you think it might be, which is not easy, and then you apply a probability factor to reflect that not all claims will result in redress.”
After calculating the uphold rate, and also considering there could be a lot of people who won't complain or claims that won't come to fruition, firms will set aside capital with this asset retention requirement.
“It's a high hurdle to prove that advice was suitable,” Abraham said.
“It can go around in circles and you get situations where a firm that reviews its advice finds it suitable, the FCA reviews advice and finds it suitable and then the Fos says it's unsuitable.”
Managing risk
Abraham explained it was important to understand redress and what the factors impact on redress.
“That's an important first step and with the consumer duty, firms should be doing that anyway,” she added.
