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ombudsman news

issue 50

November/December 2005

redress for pension mis-sale cases that fall outside the Pensions Review

This article explains how – from 1 October 2005 – we have been dealing with redress in complaints about pension sales that fall outside the period covered by the industry-wide Pensions Review. We are taking a different approach to that used in Pensions Review cases because – unlike Pensions Review cases, these complaints are not a "closed" group relating to a specific fixed period. Pensions Review cases continue to be handled in line with the review methodology and assumptions fixed by the Financial Services Authority (FSA).

background

The regulators – first the Personal Investment Authority and subsequently the FSA – laid down the methodology and assumptions to be used in the Pensions Review (such as the discount rate used to value future benefits). The methodology and assumptions were revised on several occasions – most recently in April 2003.

Along with many firms, we often used that same methodology when dealing with pension cases that were similar, but fell outside the boundaries of the review. This methodology had the advantage of being understood by firms and consumer groups and – in the context of the review – it carried the authority of the FSA.

But the Pensions Review is now drawing to a close. And the FSA’s Pensions Review Bulletin 27 announced that – unless exceptional circumstances arose – it would not be updating the assumptions last revised in April 2003. It said firms should continue using those assumptions for Pensions Review cases, regardless of the future date of settlement.

This raised the issue of what approach firms – and the ombudsman service – should take for similar pension cases that fall outside the Pensions Review. Bulletin 27 accepted that firms would continue referring to the methodology and assumptions as benchmarks. But it required firms to consider how far the methodology and assumptions remain appropriate in individual cases.

This meant there might be inconsistencies between different firms' approach to cases outside the review – and between those cases and cases within the review. And firms would be unsure if the approach they adopted was likely to be upheld if the case was referred to the ombudsman service. This will become an increasing problem over time.

"wider implications"-

We adopted our "wider implications" process to look at this issue.

Given the relatively small number of customers with outstanding Pension Review cases – and the advantages of cost savings, speed of conclusion and certainty – the FSA decided it was not appropriate for it to sponsor the updating of the assumptions.

We concluded there would be benefits for all concerned if there were greater certainty about the methodology and assumptions to be applied in cases that fall outside the Pensions Review. Continuing with the wider implications process, we invited the chairman of the Investment Liaison Group (on behalf of the industry) and the chairman of the Financial Services Consumer Panel (on behalf of consumers) to each nominate an expert to provide input.

These experts were in broad agreement with the proposal that we should

  • use the same methodology as for Pensions Review cases; and
  • commission PricewaterhouseCoopers LLP (who advised the FSA on appropriate assumptions for the Review) to report to us on assumptions to be used for future cases.

future basis

With effect from 1 October 2005, redress will usually be based on the Pensions Review methodology – but will refer to the assumptions below, recommended by PricewaterhouseCoopers in their report.

We plan to ask PricewaterhouseCoopers to review these assumptions every April – although we are not expecting changes to be necessary as at 1 April 2006.

financial assumptions: 1 October 2005

These assumptions apply for calculations of:

  • prospective loss; and
  • redress.

validity

All calculations done in the period from 1 October 2005.

as at date

All calculations of prospective loss and redress of prospective loss done in this period, and the value of all personal pensions, should be done as at 1 October 2005.

discount rate

Using this basis, the table of interest rates is shown below.

term to retirement average interest rate in force over period to retirement
0 5.0
1 5.1
2 5.2
3 5.2
4 5.3
5 5.3
6 5.4
7 5.5
8 5.6
9 5.7
10 5.8
11 5.9
12 6.0
13 6.1
14 6.1
15-19 6.2
20-24 6.4
25-29 6.5
30 or more 6.6
The interest rate for annuities in payment is that for zero years to retirement.
Retail Prices Index ("RPI") 3.00% per annum
Limited Price Indexation ("LPI") 2.90% per annum
Section 21 orders (future) RPI + 2.00% per annum
Statutory revaluation in deferment 3.00% per annum
Escalation of post- 5 April 1988 GMP 2.90% per annum
Escalation at RPI capped at 3.00% 2.90% per annum
mortality
Standard table PA (90) rated down 6 years.
Walter Merricks, chief ombudsman

ombudsman news issue 50 [PDF format]

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.