The additional compensation sum represents interest accruing on the redress payment from the effective date of the calculation to the date redress is paid.
Another important point to note is that redress calculations must either be carried out by an actuary or using an approach approved by an actuary.
Firms can use actuarial software to calculate redress to the extent that “they have the competence to do so”, but defining competence in this context is difficult.
It is clear that as a minimum firms will need to understand the inputs of the relevant actuarial tool. However, the complexity of a redress calculation will reflect the complexity of the ceding DB scheme, and some schemes have more complicated benefit structures than others.
In practice, therefore, it may be hard for firms to establish whether the software they are using is appropriate for the calculation in hand.
As a result, where firms are carrying out a number of redress calculations – for example as part of a past business review exercise – they may need to seek actuarial oversight in order to be satisfied that they have complied with the guidance.
Setting actuarial assumptions for the redress calculation
PS22/13 introduces a number of changes to the actuarial assumptions underlying redress assumptions.
Some of these changes reflect a move towards the approaches for assumption setting used in wider pensions advice.
For example, a more up-to-date mortality assumption is applied, and there is now a more robust methodology for allowing for the maximum annual increase that typically applies once pensions are in payment.
Other changes are more redress-specific and have the potential for a more material impact on the redress payment. The most significant changes are:
1. The 'proportion married' assumption
DB schemes typically pay spouse’s benefits following the death of a scheme member. The value placed on these benefits within the redress calculation reflects the likelihood of the individual being married at the time of death.
Under FG17/9, it was assumed that for individuals who had not yet reached retirement age, there was an 85 per cent chance that they would be married at retirement.
The proportion married assumption now takes into account both an individual’s age and their current marital status. For example, if someone is five years from retirement and is currently married, it is assumed that there is a 95 per cent chance of them remaining married at retirement.
For a single person who is five years from retirement, the likelihood of them being married at retirement drops to 10 per cent.
2. Allowance for charges applying on the personal pension
The allowance made for charges applying to the personal pension has been amended to reflect default product and advice charges.
Alongside this, PS22/13 introduces a requirement to consider consequential losses arising from initial adviser charges. These charges will be between £1,000 and £3,000 but will only apply in certain circumstances, such as where the customer is not already receiving financial advice.
