Retail Prices Index changes and DB pension transfer redress

In the November 2020 Spending Review, the Government announced changes to the way that the Retail Prices Index (RPI) inflation measure is calculated from February 2030.

Our Finalised Guidance 17/9: Guidance for firms on how to calculate redress for unsuitable DB pension transfers[1] refers to both the RPI and the Consumer Prices Index (CPI), an alternative inflation measure.

The RPI change means that from February 2030 the -1% adjustment to the RPI assumption used in the guidance to calculate the CPI assumption will not reflect the assumed difference between the RPI and the CPI. It will be too large and some consumers may not receive the correct amount of redress.

This will affect consumers who transfer out of DB pensions that are uprated annually in line with the CPI. We will therefore update the CPI adjustment in the guidance to ensure that these consumers continue to receive appropriate redress.

We intend to update the CPI adjustment by mid-March 2021 and will do so without prior consultation. Consulting on this technical change would delay the correct amount of redress paid to consumers. We will backdate the change to 25 November 2020 but in practice would expect it to apply only to calculations carried out from the first business day of the following quarter (ie 1 January 2021), as set out below.

What firms should do while we are updating the guidance

The actions set out below apply to calculations of pension transfer redress offers done in accordance with our guidance on or after 1 January 2021, as set out above. For example, in relation to consumer complaints, reviews of past business by the firm, and complaints made to the Financial Ombudsman Service. They apply regardless of whether a redress offer has already been settled with a consumer, including on a ‘full and final settlement’ basis.

If, after considering this statement, a firm believes that a calculation might have unduly disadvantaged a customer, they should revisit the calculation:

• Firms should consider whether the current approach to calculating CPI inflation in the guidance causes disadvantage to consumers, given changes to market inflation expectations reflected in the Bank of England’s UK instantaneous implied inflation forward curve[2] (gilts) following the Government’s announcement. This is consistent with the general obligation set out in Principle 6 to pay due regard to customers’ interests and treat them fairly, as well as the specific requirements in DISP 1.4.1R to assess complaints fairly, consistently and promptly. 
• We consider unfair treatment of a customer is likely to arise where a redress calculation under the guidance does not put the customer into the position they would have been in if the non-compliant or unsuitable advice had not been given, or the breach had not occurred (paragraph 2 of the guidance). Where possible, firms must ensure that the redress calculation reflects the features of the customer’s original defined benefit pension scheme (paragraph 3 of the guidance).
• Where a customer was eligible for CPI-uprated benefits if they had not transferred, and firms are aware that applying the guidance results in an inflation assumption that does not reflect CPI, they must account for this in their redress calculation. If firms are unsure how to account for this, eg they need to wait for us to update our guidance before proceeding with the redress calculation, they must advise the customer of this. 
• Firms that are concerned about running over the 8 week limit in our rules for responding to complaints should send a written response explaining why and indicate when they will provide a response (DISP 1.6.2R). 
• Firms should not settle redress payments, including on a ‘full and final settlement’ basis, until the guidance has been updated.

Our work on DB transfers

Addressing unsuitable defined benefit (DB) transfers has been a key priority for us since the pension reforms, commonly known as the ‘pension freedoms’, were introduced in 2015. We published new rules and guidance for firms advising on DB transfers to improve the suitability of advice. We also take significant action where we consider that firms have not met the standards of advice and behaviour we expect when giving DB transfer advice. Find out more on our DB transfers webpage[3].