Gathering the information needed to perform a redress calculation
The first step in the redress calculation process will be to obtain the information needed to calculate redress, including details of the ceded DB pension, the personal pension arrangement to which monies were transferred, and the consumer themselves.
When requesting information from a consumer, a firm must:
- explain why the information is needed;
- explain what will happen if the information is not provided;
- only request from the customer information that is needed for the calculation and that the customer can reasonably be expected to provide;
- give the customer at least 14 days to respond;
- make a second request, if no response is received (or if the information provided is insufficient), again giving at least 14 days to respond; and
- if the customer is unresponsive, make the customer aware that the redress calculation may have to be discontinued.
The above process may need to be adapted to the specific circumstances of the customer.
If insufficient information is received through the process outlined above, then firms may need to liaise directly with the DB scheme or the personal pension provider.
In practice, when liaising with the DB scheme it may be easier to seek assistance from the actuarial firm that will be preparing the redress calculation, as they will be able to identify any potential complexities of the calculation.
The actuary will also be best placed to advise on what steps to take if the scheme is unwilling to provide all the information required to complete the calculation.
Actuarial methodology for determining redress
As under the old guidance FG17/9, the objective of the redress payment is to place the customer in the same position as they would have been in had they not transferred out of the DB scheme.
A key change to the calculation methodology is that there are now three components to the redress payment.
The primary compensation sum broadly reflects the methodology that was adopted under FG17/9, namely a comparison of the value of the DB pension that would have been received and the value of the benefits arising from the personal pension, assuming that it is invested in growth assets until retirement age and then used to purchase an annuity.
Much of the content of DISP Appendix 4 sets out in detail the actuarial approach to be adopted in determining the value of the DB pension.
The specified methodology broadly reflects the approach that should have been adopted under FG17/9.
It is likely that the FCA has decided to document this more clearly in recognition of the fact that there were instances where firms attempted to carry out their own redress calculations without following the approach that would have been applied by an actuary.
The secondary compensation sum makes allowance for any losses incurred as a consequence of the unsuitable advice.
As discussed further below, there is a requirement to make allowance in this item for initial adviser charges in certain circumstances.
Other possible 'consequential losses' could arise as a result of tax charges incurred as a result of the transfer (for example lifetime allowance charges incurred to date) or if the consumer has had to take tax advice as a result of the advice they received.
