FCA considers higher compensation limits for pension claims

In a feedback statement to its compensation review, published on December 14, the FCA said several respondents called on the City watchdog to review current limits for pension product claims. 

A discussion paper, published last year, considered the limits on compensation payable by the Financial Services Compensation Scheme and wanted to explore if stakeholders considered compensation limits provided appropriate protection.

The current limit is £85,000 for most types of claim covered by the FCA’s rules. 

The watchdog also asked whether it may be appropriate to introduce a periodic review of compensation limits, to ensure that these remain at an appropriate level over time. 

But, in its feedback, respondents were roughly split evenly between those who considered limits should be increased and those who felt they should be maintained. 

Few respondents suggested that limits should be reduced, the FCA said.

Instead, some respondents highlighted that a material proportion of pension claims dealt with by the FSCS are not compensated in full, and stressed the importance of pension savings for consumers’ financial wellbeing.

From those who called for an increase in limits for pension claims, there were mixed views on how much they should go up by, with some respondents suggesting that these should be compensated in full with no limit. 

Others argued that a separate limit for pension claims should be introduced that covers the majority of these, matches the Financial Ombudsman Service’s maximum award limit (currently £375,000) or matches the lifetime pensions allowance (currently £1.073mn).

The FCA said: “While we consider that the current compensation limits are set at a reasonable level for most types of claim, we believe that it is appropriate to consider further the protection available for claims about pensions.”

The watchdog said its analysis of FSCS data found that in 2021, 30.1 per cent of pension claims exceeded the compensation limit, compared with 6.2 per cent of overall investment intermediation claims falling to the life distribution and investment intermediation funding class. 

Between 2019 and 2021, the number of pension intermediation claims where its value exceeded the compensation limit increased from 1,477 to 2,461 – pointing to a growing number of customers who were not compensated in full.

The FCA said its work on advice to transfer out of defined benefit pension schemes – particularly in the context of the consumer redress scheme created under the British Steel Pension Scheme case – highlights the significant impact that bad pensions advice can have on consumers’ wellbeing. 

“We have seen some cases where individuals’ losses total several hundred thousand pounds, meaning that, if the advising firm responsible for the bad advice goes out of business, the impacted consumer would not be able to recover all their losses from the FSCS,” it said.

“Given this, we think there is merit in looking specifically at whether the increase in the proportion of pension claims that involve losses in excess of the FSCS’s compensation limit seen in 2021 was a short-term ‘blip’ or points to a longer-term trend, and whether higher limits for pension claims might be appropriate.”

The FCA said it plans to commence a review of the current compensation limits in 2023, particularly to consider whether it would be appropriate to increase compensation limits for certain pension claims.

“As any increase in compensation limits would increase potential claims costs falling to FSCS levy payers, we will carry out the review of compensation limits alongside work to review the current funding classes,” it added.

This article first appeared on FTAdviser.com