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DISP App 4.3 Steps for redress calculation

DISP App 4.3.1R

1A firm must take the 5 steps set out in this section to carry out a redress calculation.

DISP App 4.3.2G

1The diagram at DISP App 4 Annex 3 explains the 5 steps for the redress calculation in diagrammatic form, with reference to the relevant sections of the rules and guidance. To the extent there is any inconsistency between the diagram and the rules, the rules will prevail.

Step 1: obtain the necessary information to calculate redress

DISP App 4.3.3R

1The first step is for the firm to obtain the necessary information about the consumer’s:

  1. (1)

    DC pension arrangement;

  2. (2)

    defined benefit occupational pension scheme or, if there is more than one defined benefit occupational pension scheme, the one which the consumer would most likely have had rights in if they had received compliant pension transfer advice determined in accordance with DISP App 4 Annex 1 16.1G to 16.5G;

  3. (3)

    personal and financial situation; and

  4. (4)

    preference for redress to be paid either as a cash lump sum, or by full or partial augmentation where it is possible to do so without the consumer incurring a tax charge or liability,

to enable it to complete the redress calculation and make a redress offer.

DISP App 4.3.4R

1A firm is entitled to rely on information previously provided by the consumer unless it is aware or ought to be aware that the information is out of date, inaccurate or incomplete.

DISP App 4.3.5G

1Information that may be relevant to calculating redress is set out at 2.

DISP App 4.3.6R

1To obtain the necessary information required to calculate or offer redress, a firm must:

  1. (1)

    identify whether there is any relevant information held on its client file or in publicly available records; and

  2. (2)

    if the information in (1) is not sufficient or could have changed:

    1. (a)

      request information from the consumer; and

    2. (b)

      with the consumer’s permission, contact the provider of the consumer’s DC pension arrangement and defined benefit occupational pension scheme and, where relevant, HMRC or DWP to obtain the information.

DISP App 4.3.7R

1When offering to calculate how much redress could be paid by full or partial augmentation, the firm must explain to the consumer that:

  1. (1)

    the redress offer will be calculated on the basis that the redress will be invested prudently by the consumer; and

  2. (2)

    augmenting a defined contribution pension scheme is one way in which the redress can be invested prudently.

DISP App 4.3.8R

1Requests for information in DISP App 4.3.6R must be in a durable medium.

DISP App 4.3.9R

1The firm must only make requests for information that are necessary for the redress calculation that the firm is carrying out and, in relation to requests made to the consumer, information which the consumer can reasonably be expected to provide.

DISP App 4.3.10R
  1. (1)

    1A firm must give a consumer a clear description of the information needed and explain why the information is needed to calculate redress and the consequence if the consumer does not provide the information.

  2. (2)

    A firm must give a consumer at least 14 days from receipt of the request to respond to any request for information.

  3. (3)

    If the consumer does not respond to the first request for information, or responds with insufficient information, the firm must make a second request for information and give the consumer at least 14 days to respond.

  4. (4)

    If the consumer does not respond to the second request for information, or responds with insufficient information, the firm must contact the consumer again, indicating that the firm may have to discontinue the redress calculation if no reply is received.

  5. (5)

    A firm may make one or more subsequent requests for information if the consumer’s personal circumstances support the making of such further requests.

  6. (6)

    A firm may make reasonable additional requests for information if the consumer requests that the firm calculate the redress offer by augmentation.

DISP App 4.3.11G

1A firm should take care to adapt the procedures in DISP App 4.3.6R to 4.3.10R to the individual circumstances of the consumer and exercise sensitivity when requesting information about a consumer’s personal circumstances. It may be appropriate to allow the consumer more time to provide a response or to make more attempts to contact the consumer.

DISP App 4.3.12R

1If, after following the procedures in DISP App 4.3.6R to 4.3.10R, a firm does not have the necessary information about the consumer’s DC pension arrangement, defined benefit occupational pension scheme and/or personal and financial situation to enable it to properly assess whether the consumer has suffered loss, the firm must:

  1. (1)

    in the first instance, attempt to calculate redress on the basis of the information it holds; and

  2. (2)

    if it is not possible to calculate redress without further information, consider whether it is appropriate to discontinue the redress calculation.

DISP App 4.3.13G

1Before deciding to discontinue a redress calculation (see DISP App 4.3.12R(2)), a firm should consider whether it can extrapolate from information on the client file or make assumptions based on public or generic sources of information (for example, on typical retirement ages for the consumer’s occupation) to use in the redress calculation.

DISP App 4.3.14G

1A firm is not required to repeat a redress calculation after it has communicated a redress offer if the consumer subsequently provides information about their defined benefit occupational pension scheme or personal and financial situation which was reasonably requested by the firm following the procedures in DISP App 4.3.6R to 4.3.10R.

Step 2: determine when the consumer would have taken retirement benefits from the defined benefit occupational pension scheme

DISP App 4.3.15R
  1. (1)

    1The second step is for the firm to determine whether the consumer would have already taken retirement benefits from their defined benefit occupational pension scheme if, at or prior to the valuation date, they had remained a member of that scheme.

  2. (2)

    To determine whether the consumer would have taken retirement benefits from their defined benefit occupational pension scheme at or prior to the valuation date, firms must apply the rebuttable presumption at DISP App 4.3.16R.

DISP App 4.3.16R

1A firm must presume that a consumer would have taken pension benefits from their defined benefit occupational pension scheme at their normal retirement age in their defined benefit occupational pension scheme or on death if their death preceded their normal retirement age.

DISP App 4.3.17G

1The presumption in DISP App 4.3.16R will be rebutted where the evidence shows that it is more likely than not that the consumer or a beneficiary would have taken benefits from their defined benefit occupational pension scheme on an alternative date. Examples of such evidence include:

  1. (1)

    the consumer has used some or all of their transfer proceeds to purchase an annuity; or

  2. (2)

    the consumer would have taken early or late retirement benefits from their defined benefit occupational pension scheme, having regard to:

    1. (a)

      the consumer’s demands, needs and intentions at the time of the pension transfer advice (evidence from the time of the advice is more likely to be relevant if it shows that the consumer had a considered plan for taking retirement benefits early from their defined benefit occupational pension scheme);

    2. (b)

      any information gathered by the firm subsequently about the consumer’s reasons or plans for accessing pension benefits from their DC pension arrangement; and

    3. (c)

      any evidence that demonstrates that the consumer or members of their household changed or plan to change their working pattern at a similar time to the consumer taking regular benefits from their DC pension arrangement; or

  3. (3)

    the firm has written confirmation that the consumer considers themselves to be retired from a date which is earlier than normal retirement age.

DISP App 4.3.18G

1The presumption in DISP App 4.3.16R is unlikely to be rebutted where there is:

  1. (1)

    evidence from the time of the pension transfer advice that indicates that there is a risk that the consumer’s intentions were influenced by the firm’s non-compliant pension transfer advice; or

  2. (2)

    evidence of irregular pension commencement lump sum withdrawals, particularly if the consumer is still working; or

  3. (3)

    evidence of full withdrawal of a pension commencement lump sum unless:

    1. (a)

      the pension commencement lump sum is being or has been used for regular income payments; or

    2. (b)

      the consumer was in financial difficulty or in ill health at the time of the non-compliant pension transfer advice.

Step 3: carry out redress calculation

DISP App 4.3.19R

1The third step is for the firm to calculate whether (X) is greater than (Y) on the valuation date using the formula at DISP App 4.4.2R, where:

  1. (1)

    (X) is the estimated value of the benefits in the defined benefit occupational pension scheme together with the difference in SERPS had the consumer remained a member; and

  2. (2)

    (Y) is the value of the benefits from the consumer’s DC pension arrangement.

DISP App 4.3.20R

1Where (X) is greater than (Y), the consumer has suffered a loss and the amount calculated is the primary compensation sum to be used when producing a redress offer at DISP App 4.3.29R.

Dates for calculation

DISP App 4.3.21R

1The valuation date must be the first day of the quarter (for calculations undertaken within that quarter).

DISP App 4.3.22R

1The redress calculation date must fall within the same quarter as the valuation date but does not have to be the same date as the valuation date.

DISP App 4.3.23R
  1. (1)

    1Redress calculations must be based on the new assumptions available on the first day of each new quarter, using publicly available data from the final business day of the quarter immediately before.

  2. (2)

    If a firm carries out a further redress calculation after expiration of the validity period in DISP App 4.3.24R and 4.3.25R, including following a settlement or award made by Financial Ombudsman Service, that calculation must be based on the new assumptions for the quarter in which it is carried out.

DISP App 4.3.24R

1Redress calculations must remain valid for 3 months from the date the redress offer is sent to the consumer, irrespective of quarterly changes to the assumptions.

DISP App 4.3.25R

1A firm must extend the validity of the redress calculation for a reasonable period of time if there are circumstances outside of the consumer’s control which impact on the consumer’s ability to accept or reject a redress offer.

DISP App 4.3.26G
  1. (1)

    1Circumstances outside of the consumer’s control for the purposes of DISP App 4.3.25R include:

    1. (a)

      errors by the firm in the carrying out the redress calculation which mean the redress calculation needs to be repeated or amended by the firm; and

    2. (b)

      exceptional personal circumstances experienced by the consumer, including bereavement or incapacity.

  2. (2)

    Firms should ensure that they treat the consumer fairly when determining a reasonable time for the validity of the redress calculation to be extended by.

Step 4: work out redress offer

DISP App 4.3.27R

1A firm must offer a consumer redress that, as far as possible, puts the consumer into the position they would have been in if they had received compliant pension transfer advice.

DISP App 4.3.28R

1Redress offers must be issued to the consumer promptly following the calculation date and within 3 months of the valuation date.

Redress components

DISP App 4.3.29R

1The redress must consist of the sum total of:

  1. (1)

    the primary compensation sum calculated in accordance with DISP App 4.3.19R and 4.3.20R, adjusted to take account of the consumer’s tax position and any entitlement to means-tested state benefits; and

  2. (2)

    a secondary compensation sum comprising any consequential losses, including any initial adviser charges on the DC pension arrangement and the primary compensation sum at (1) in accordance with DISP App 4.3.32G, calculated using the formula at DISP App 4.4.19R; and

  3. (3)

    an additional compensation sum to compensate the consumer for the lapse of time between the valuation date and the payment date calculated in accordance with DISP App 4 Annex 1 14.1G to 14.3G.

DISP App 4.3.30R

1A firm must adjust the redress offer to take account of:

  1. (1)

    the consumer’s individual tax position, including (if the consumer directs that all or part of the redress be paid by full or partial augmentation) allowances on pension contributions eligible for tax relief; and

  2. (2)

    the consumer’s entitlement to means-tested state benefits.

DISP App 4.3.31G
  1. (1)

    1Firms should have regard to where the redress methodology in this appendix already factors in tax, such as when taking into account of pension commencement lump sums.

  2. (2)

    Where redress is paid (or partially paid) by augmentation, a consumer will usually pay income tax when accessing their funds.

  3. (3)

    A firm may adjust cash lump sum payments to take account of a notional deduction for tax on income from the consumer’s pension.

  4. (4)

    Where a cash lump sum payment could affect a consumer’s entitlement to means-tested state benefits, a firm should take reasonable steps, with the agreement of the consumer, to ensure that the consumer does not suffer a reduction in income as a result of the redress payment. Steps that may be taken by a firm to prevent a consumer suffering a reduction in income may include:

    1. (a)

      paying redress by full augmentation;

    2. (b)

      paying redress as a cash lump sum up to an applicable capital or savings limit for the purposes of a state benefit eligibility means test, with the balance of the redress being paid by partial augmentation; or

    3. (c)

      only after informing the consumer that they should seek free impartial guidance from an appropriate source, such as a Citizens Advice Bureau, cooperating with the consumer to put in place any arrangement, including the payment of redress in instalments over one or more future tax years:

      1. (i)

        which the consumer has been informed would not affect their eligibility or income from means-tested state benefits;

      2. (ii)

        which would not breach any regulatory requirement of the firm; and

      3. (iii)

        if the arrangement involves the deferment of any part of the redress payable to the consumer, the firm pays an additional compensation sum in accordance with DISP App 4.3.29R(3), which is calculated to the payment date in respect of the deferred part.

  5. (5)

    If a firm has clearly informed the consumer of reasonable steps that may be taken to avoid a reduction in their income from means-tested state benefits, the firm will not be acting in breach of PRIN 6 by continuing to pay redress in accordance with this appendix if the consumer does not agree to any of those reasonable steps being taken.

DISP App 4.3.32R

1Consequential losses must include the cost of initial adviser charges using the assumptions in DISP App 4 Annex 1 9.1G if the consumer’s assumed retirement date is after the valuation date, and:

  1. (1)

    the consumer is not in an ongoing advice arrangement with any firm; or

  2. (2)

    the consumer is in an ongoing advice arrangement with the firm that gave the non-compliant pension transfer advice, where;

    1. (a)

      the firm is charging the consumer more than the default ongoing adviser charges in DISP App 4 Annex 1 9.1G(2); and

    2. (b)

      the firm will not provide an undertaking to reduce its ongoing adviser charge to the level of the default ongoing adviser charge (or lower) for the period to the consumer’s assumed retirement date.

Means of payment

DISP App 4.3.33R
  1. (1)

    1A firm must always calculate and offer to pay the total amount of redress in DISP App 4.3.29R (with adjustments in DISP App 4.3.30R) as a cash lump sum payment.

  2. (2)

    Where a firm has the necessary information, the firm may also calculate the redress offer to be paid by augmentation without receiving a request to do so from the consumer.

  3. (3)

    If the firm calculates the redress that would be paid by augmentation, it must offer the consumer the option of the redress being paid by augmentation or by a lump sum cash payment.

  4. (4)

    If, during the period in which a redress calculation remains valid in accordance with DISP App 4.3.24R to 4.3.26G, a firm is requested to calculate the redress payable by augmentation, it must carry out that calculation promptly.

  5. (5)

    A firm must not charge the consumer for calculating how much of the redress could be paid by augmentation.

DISP App 4.3.34G

1When calculating the sum that would be payable by augmentation, a firm must act prudently, taking account of uncertainty around the consumer’s potential tax position at the end of the tax year, and determine the amount of the redress payment which could be paid by augmentation without exceeding the consumer’s:

  1. (1)

    allowance for personal contributions in the tax year;

  2. (2)

    annual allowance, including any carry forward from previous tax years; or

  3. (3)

    lifetime allowance.

DISP App 4.3.35G
  1. (1)

    1Factors which may be relevant to whether full or partial augmentation would result in a consumer exceeding their annual or lifetime allowance or allowance for personal contribution include:

    1. (a)

      the consumer’s relevant earnings in the current tax year;

    2. (b)

      the value of all pension contributions already made in the current tax year;

    3. (c)

      if the redress payment would result in the consumer’s unused annual allowance in the current and previous 3 tax years being exceeded;

    4. (d)

      the expected value of all pensions held by the consumer up to the age of 75;

    5. (e)

      any lifetime allowance protections secured by the consumer;

    6. (f)

      any applicable lifetime allowance protection enhancement factors;

    7. (g)

      any benefit crystallisation events; and

    8. (h)

      whether the consumer’s money purchase annual allowance has been triggered.

  2. (2)

    Unless DISP App 4.3.33R(2) applies, the firm may make reasonable requests for information from the consumer where it is necessary for the firm to calculate the amount of redress which could be paid by augmentation.

Step 5: communicate outcome of redress calculation

DISP App 4.3.36R

1The fifth step is for the firm to communicate the outcome of the redress calculation and any redress offer to the consumer.

DISP App 4.3.37R

1The communication in DISP App 4.3.36R must be in a durable medium.

DISP App 4.3.38R

1The communication in DISP App 4.3.36R must include the following information:

  1. (1)

    An explanation of the redress calculation, including:

    1. (a)

      confirmation that the redress has been calculated in accordance with the FCA’s rules and guidance using an approach which has been approved by an actuary; and

    2. (b)

      an explanation that the redress calculation takes account of the market conditions at the valuation date and this could mean that the redress might be different if it was calculated on a different date; and

    3. (c)

      the information and assumptions used in the redress calculation, including:

      1. (i)

        the retirement date used in the calculation; and

      2. (ii)

        whether the firm has determined that the consumer would have retired in their defined benefit occupational pension scheme at or prior to the valuation date and if so:

        1. (A)

          the basis for this determination;

        2. (B)

          the impact of the determination on the valuation of the consumer’s defined benefit occupational pension scheme (including the percentage reduction applied for early retirement) and, where the actual reduction for the consumer’s defined benefit occupational pension scheme has not been used in the calculation, an explanation of the approach used and its impact on the redress offer; and

        3. (C)

          any assumptions made about the allowance for the pension commencement lump sum including, where the actual commutation factors for the consumer’s defined benefit occupational pension scheme have not been used in the calculation, an explanation of the approach used and its impact on the redress offer; and

      3. (iii)

        if late retirement factors for the consumer’s defined benefit occupational pension scheme have not been used in the calculation, an explanation of the approach used in the calculation by the firm and its implications for the redress offer;

      4. (iv)

        the value the firm has placed on any illiquid or unquoted assets and the reasons for that valuation;

      5. (v)

        the level of future investment returns assumed by the calculation, including an invitation for the consumer to review their current investment strategy to ensure it is in line with this assumption; and

      6. (vi)

        the level of any charges, including product, platform and adviser charges, that the consumer is currently paying compared to the level assumed in the redress calculation, including any allowance made for initial advice from a new adviser; and

      7. (vii)

        any assumption made about the consumer’s marital or civil partnership status;

      8. (viii)

        if there is more than one defined benefit occupational pension scheme which the consumer could have had rights in, the information required by 1 16.1G to 16.5G;

      9. (ix)

        whether the consumer’s defined benefit occupational pension scheme has entered or is in the Pension Protection Fund assessment period and, if so, any future increases to the value of the consumer’s benefits which are certain and quantified, and which are known, or reasonably ought to be known, by the firm at the calculation date; and

      10. (x)

        where RPI, CPI or earnings inflation rates are used in the redress calculation, an explanation of the published rate underlying the rate used and its source (for example, the Bank of England website) where it can be checked by the consumer, without any adjustment for annualisation.

  2. (2)

    An explanation of the redress offer, including:

    1. (a)

      if there is no loss on the valuation date, a clear explanation of why this is the case; and

    2. (b)

      if the result is a loss on the valuation date:

      1. (i)

        the total amount of redress calculated, with the primary compensation sum and the secondary compensation sum shown separately;

      2. (ii)

        confirmation that if the redress offer is accepted by the consumer, the redress paid by the firm will be increased to include the additional compensation sum;

      3. (iii)

        an offer to make payment of redress as a cash lump sum;

      4. (iv)

        the warning in the form at DISP App 4.3.39R;

      5. (v)

        if it has not already been requested by the consumer, an offer to calculate free of charge the redress that would be payable by full or partial augmentation; and

      6. (vi)

        an explanation of how the consumer’s tax position and entitlement to state benefits has been taken into account, including an allowance for any tax charges for which the consumer will be liable (and where the consumer is responsible for any payment of tax, this should be made clear and a recommendation that they contact HMRC provided).

  3. (3)

    The terms and conditions of any redress offer, including the following information:

    1. (a)

      a statement requesting that the consumer review the assumptions used in the redress calculation and explaining that they may raise any questions about them with the firm;

    2. (b)

      that the redress offer is valid for a 3-month period from the date it is issued to them, during which period the consumer can consider their options and the offer will remain open for acceptance;

    3. (c)

      how to request that the firm calculate the redress that would be paid if the consumer directs for the redress to be paid by full or partial augmentation;

    4. (d)

      how to accept or reject the redress offer; and

    5. (e)

      the process for resolving any complaints about the redress calculation or redress offer.

DISP App 4.3.39R

1Where any of the redress is paid in the form of a cash lump sum to the consumer, a firm must provide:

  1. (1)

    a warning that this amount, in addition to the pension value in the consumer’s DC pension arrangement, is intended to provide the consumer with the equivalent retirement income they would have received if they had not transferred out of their defined benefit occupational pension scheme, but only as long as the consumer invests it prudently; and

  2. (2)

    a warning that if the consumer does not invest the redress prudently, they risk losing out on the retirement income their redress amount is meant to provide; and

  3. (3)

    information about trusted sources of free advice and guidance on making investment decisions and avoiding investment scams, such as Pension Wise, MoneyHelper and the FCA’s ‘Scam Smart’ guidance; and

  4. (4)

    an explanation of the risk and consequences of making an unauthorised payment, including the risk of unauthorised payment charges being levied.

DISP App 4.3.40R

1When a firm communicates a redress offer to a consumer, it should:

  1. (1)

    take reasonable steps to communicate in a way that is fair, clear and not misleading;

  2. (2)

    take into account the information needs of the consumer, including their understanding of financial services; and

  3. (3)

    where possible, use plain language and avoid the use of jargon, unfamiliar or technical language.