Ask Harry Eastwood: The challenges of Defined Benefit redress calculations

Our Q&A interview with Harry Eastwood, Actuarial and Redress Director at TCC, explores the common obstacles when calculating redress for pension transfer cases.

Understanding your redress liability has always been a high priority in the Defined Benefit (DB) pension transfer space.

With the increased risk of unsuitable advice, and the challenges around securing PI cover, being aware of your firm’s exposure can help proactively address the regulator’s concerns as well as informing the future strategy of your business.

Nevertheless, in our experience, firms often start calculations without understanding some of the stumbling blocks they will likely face along the way, and while these challenges aren’t unique to DB transfers, they tend to cause more of an issue when the stakes are high and there’s added pressure to complete the project quickly.

Harry highlights the top three challenges for DB transfer calculations:

1.The additional information needed

With all pension transfers, there tends to be many factors that could impact the amount of compensation paid to the end client.

When calculating loss, you need to take into account any changes to the ceding scheme since the transfer took place and the investment performance of the receiving scheme. These could be influenced by a number of events or scheme-level changes, such as the adoption of CPI for revaluation or a scheme’s entry into the PPF.

2.The complexity of data gathering 

There are many reasons why gathering the information you need could end up being a more painful process than expected.

We often find that ceding schemes are unresponsive. In some cases, the ceding scheme has wound up or been bought out by its trustees since the transfer was made, making the contact details difficult to locate.

With receiving schemes, problems often arise where the transfer is to a SIPP invested by a discretionary fund manager (DFM), making it difficult to get a valuation for the transfer element on its own.

Either way, unexpected obstacles like this can get in the way of arriving at a final figure.

3. The expert judgement needed

There’s a lot of unknowns in calculating redress on pension transfer cases.

As we’ve seen, you might be trying to identify the current value of a transfer when it is combined with other investments in an actively managed portfolio. Or you might have patchy data from a now defunct scheme. It takes experience to make a judgement on whether a loss assessment is possible with the information you have.

And it’s all the more important when the regulator is watching, so many of our clients turn to TCC for help getting it right first time.

So what can you do about it?

Provisioning calculations – Redress provisioning can be completed without the same levels of data gathering as full calculations – so you can get an indication of your liability quickly and without the time-consuming admin.

Trust the experts – Outsourcing calculations to an experienced provider like TCC means you’ll benefit from greater accuracy and a clear, independent view of your liability – without all the hassle of doing the data gathering yourself.

Harry Eastwood is TCC’s Actuarial and Redress Director.