Falling annuity rates have reduced DB transfer redress payments
Annuity rates have risen sharply over the past 18 months and the saver will now be in a position to secure a considerably higher level of guaranteed income from their remaining pension pot. This will minimise the financial disadvantage for those seeking compensation having received poor advice about transferring their pension.
Rip it up and start again
OAC’s Defined Benefit Redress Tracker is developed in line with Financial Conduct Authority (FCA) rules for calculating redress with the individual assumed to have invested their funds to earn returns in line with the FTSE Private Investor Index.
This is the mandatory approach that IFA firms and the financial services companies must follow if they have received a complaint and need to calculate a redress figure as a result.
While complaints can be made to the Financial Ombudsman Service, it will generally mandate the use of the same redress rules.
It follows the example of an individual who left their scheme in 2018 aged 50, with a pension of £10,000 p.a. which would receive inflation linked increases when in payment.
Someone who makes a compensation claim in January 2022 could have been entitled to around £160,000, but that has now fallen to £50,000 as of July 2023.
Since 2018, redress has typically ranged between £100,000 and £150,000 as annuity rates have been suppressed, minimising the replacement income a transferors could secure if they had sought redress before 2022.
Redress is worth less?
Brian Nimmo, head of redress solutions at OAC, commented: “Defined benefit pensions offer huge security and peace of mind through retirement. The compensation process is in place to help retirees who suffered from poor advice that led to the loss of this guaranteed income throughout retirement.
“However, over the past 18 months we have seen a shift in the market whereby the rapid rise in projected annuity rates has meant people who did transfer out are now assumed to be able to secure far higher levels of guaranteed income.
“It mitigates the financial damage suffered by many DB transferors and means that they could be due significantly less compensation if they were to bring their case for compensation now.”
Reputational risk too great
While the redress process would seem to benefit the company paying compensation in the current market as their liability is reduced, the individual is receiving a capital sum that would secure retirement income for life, as a DB pension would provide. Where annuity rates were falling, as they did after 2015, the firm’s liability would increase considerably.
“In technical terms, we are talking about replacement income and placing people back In the same position they would have been if they had not made the transfer, said retirement expert Billy Burrows.
“We are talking about replacement income and placing people back In the same position they would have been if they had not made the transfer.”
Billy Burrows
If what would have been a £5,000 DB income could be replaced with a £150,000 annuity purchase, if the annuity rate increases from 3% when the transfer was made to 4%, then a smaller capital sum is required, said Burrows.
“What’s interesting is that someone who transferred a £1 million pot and placed it in the bank may be quids in now the rates have increased.”
The rules are logical, said Burrows, and the financial firm isn’t getting away with anything, even if the amount for redress is less than the original transfer.
A client will always be made whole again, while it may cost the firm a considerable amount to achieve that, particularly when annuity rates are low.
“Nobody wants to be associated with bad advice around transfers,” added Burrows. “The reputational risk is just too great.”
Once the redress calculations process has run its course, the individual saver is not compelled to purchase an annuity.
In recent years, many were more likely to place their money in a drawdown contract.
