The consultation follows an FCA announcement in August 2016 to review the methodology in response to concerns that there may be better ways to enable clients to replicate the benefits that they held in their DB pension scheme.
The UK regulator said any changes to the methodology will apply to future redress payments only, though unhappy existing clients could continue to complain to firms.
The FCA estimated firms received between 2,700 and 8,000 pension transfer complaints each year, and that under the current redress methodology the average redress is approximately £20,000 to £60,000 per complaint.
Data from the Financial Ombudsman Service further showed that over the last 10 financial years, the average number of new pension transfer complaints was approximately 400 each year, of which 40% were upheld in favour of the client.
Christopher Woolard, executive director of strategy and competition at the FCA, said: “Choosing to transfer out of a DB pension scheme is a big decision for consumers, which requires suitable advice. When that advice proves to be unsuitable, it is important that consumers receive appropriate redress.
“We think that there may be more appropriate ways to calculate redress for pension transfer complaints in future, and that is why we are looking at how the calculation works in order to achieve a fair outcome for consumers.”
The FCA’s planned changes to the methodology include:
- Updating the inflation rates used to better reflect likely inflation
- Updating the pre-retirement discount rate so that it acknowledges the Pension Protection Fund (PPF)
- Updating the post retirement discount rate and acknowledging the likelihood that consumers will take a pension commencement lump sum
- Updating the mortality assumptions
- Making allowance for gender-neutral annuity rates
- Assuming that male and female consumers are the same age as their spouse to simplify the approach
- Simplifying the assumption about the proportion of people married or in a civil partnership at retirement
- Making allowance for enhanced transfer values (ETVs)
- Updating these assumptions on a regular basis to reflect the fact that markets are often volatile.
The FCA said it intends to reach its conclusions by autumn 2017.
