Mis-sold Pension Transfers

A transaction resulting from the decision of a retail client who is an individual, to transfer deferred benefits from:

• an occupational pension scheme
• an individual pension contract providing fixed or guaranteed benefits that replace similar benefits under a defined benefits pension scheme; or
• (in the cancellation rules (COBS15)) a stakeholder pension scheme or personal pension scheme.

To:

• a stakeholder pension scheme
• a personal pension scheme; or
• a deferred annuity policy where the eventual benefits depend on investment performance in the period up to the intended retirement date.”

A pension switch is where a retail client is transferring benefits from a personal pension or stakeholder pension scheme (where there has been no previous transfer from a defined benefits scheme) to another personal pension/stakeholder pension scheme.

The definition of a pension transfer refers to deferred benefits which are benefits that are not continuing to accrue and the benefits are not being taken. If an individual has access to the benefits but is not intending to crystallise the benefits then they are deferred benefits. If an individual is transferring benefits for the purpose of immediately crystallising the benefits; this would not be considered a pension transfer.

The FSA Conduct of Business Sourcebook (COBS) has detailed requirements which must be followed before a pensions transfer specialist can advise on a transfer. These include:

• compare the benefits which are likely to be paid under the defined benefits scheme with the benefits payable under the PP/stakeholder
• give the client a copy of this comparison highlighting factors which support or do not support the firm’s advice
• give the client enough information to make an informed decision but also try to make sure that the client understands the comparison and the advice given

The FSA Pension switching Review highlighted 4 main areas of concern:

• unjustified additional costs (in 79% of unsuitable cases);
• unsuitable investments as not taken account of attitude to risk and individual’s circumstances (in 40% of unsuitable cases);
• inadequate reviews put in place or the importance of regular reviews was not explained (in 26% of unsuitable cases);
• unjustified loss of benefits from the transferring scheme (in 14% of unsuitable cases).

The Financial Ombudsman Service (FOS) has issued a Technical Guide to Redress for Pension Mis-Sales.

Compensation for Transfers in particular addresses a number of factors:

• Estimated return required to match the benefits being given up at the time of the transfer (the “critical yield”);
• A consumer’s attitude to investment risk;
• The level of any other pension provision the consumer had
• The period of time left from the transfer until the consumer’s retirement
• Was the transfer explained to the consumer – in particular, whether the benefits being given up were considered and explained.

The calculations for redress are highly complex and must compensate Clients for:

• Valuation of the impact of differing and sometimes multiple investment charges on given fund(s) assuming equal underlying investment performance over given period(s) of time.
• Valuation of the impact of differing investment charges on differing levels of investment performance over given period(s) of time.
• Valuation of lost guaranteed annuity terms.
• Valuation of lost fund guarantee.
• Valuation of lost tax free cash entitlement.
• Redress for actual loss – valuation of past loss or gain, and future loss.