Assumptions for pensions cases outside the Pensions Review
last updated July 2008
For Pensions Review cases, the FSA laid down a methodology and assumptions to be used in calculating redress. The FSA revised the assumptions (for example, the discount rate to be used to value future benefits) from time to time – most recently in April 2003.
The same methodology and assumptions were often used by firms and by the ombudsman service for similar pension cases that fell outside the boundaries of the reviews. They had the advantage that they were understood by firms and consumer groups – and, in the context of the reviews, carried the authority of the FSA.
But the Pensions Review is now drawing to a close, and so the FSA’s Pensions Review Bulletin 27 announced that, unless exceptional circumstances arise, it will not be updating the April 2003 assumptions. It said firms should continue using these for review cases, regardless of the future date of settlement.
This raised the issue of what approach firms and the ombudsman service should take for similar pension cases falling outside the boundaries of the reviews. Bulletin 27 accepted that firms would continue referring to the methodology and assumptions as benchmarks, but it required them to consider how far they remain appropriate in individual cases.
This meant there might be an inconsistent approach between different firms to cases outside the reviews – and between those cases and cases within the reviews. And firms would not know whether the approach they adopted was likely to be upheld if the case were referred to the ombudsman service. This will become an increasing problem over time.
Given the relatively small number of customers with outstanding cases and the advantages of cost savings, speed of conclusion and certainty, the FSA decided that it was not appropriate for it to sponsor the updating of the assumptions. The ombudsman service, in conjunction with the Financial Services Compensation Scheme (FSCS), concluded there would be benefits for all concerned if there were greater certainty about the methodology and assumptions that should be applied in cases outside the boundaries of the reviews.
The ombudsman service invited the chairman of the Investment Liaison Group (on behalf of the industry) and the chairman of the Financial Services Consumer Panel (on behalf of consumers) to each nominate an expert to provide input. The ombudsman service, the FSCS and the two experts met and agreed to commission updated figures from PricewaterhouseCoopers, who had previously advised the FSA on appropriate assumptions for the Pensions Review.
With effect from 1 October 2005, redress in pensions cases that fall outside the Pensions Review is usually based on the assumptions set out in this report. The assumptions are reviewed periodically by PricewaterhouseCoopers. Further details, including the latest assumptions (as at 1 July 2008), are published on the Financial Ombudsman Service website.