The FSCS has said it was ready to discuss its compensation calculation with customers or representatives after three MPs were sent a letter suggesting steelworkers were not being compensated adequately.
The Financial Services Compensation Scheme (FSCS) has responded to allegations that its methodology used to calculate compensation has disadvantaged some steelworkers.
Last week Echelon Wealthcare IFA Alastair Rush – who also founded CHIVE, a pro bono group set up to help the steelworkers – sent a letter to three MPs seeking an audience with them to discuss the methodology used by the FSCS to calculate the steelworkers’ compensation.
The main areas of concern related to the estimated fee costs, the FSCS’s take on the value of the workers’ pension pots, and the discount rate used by the lifeboat scheme to calculate compensation.
In response, the compensation scheme said it was “willing to engage” with customers or customer representatives to discuss the compensation calculation.
It said it calculated compensation using the Financial Conduct Authority’s (FCA) methodology for pension redress and that its starting point was to compare the benefits steelworkers would have had if they had transferred into British Steel Pension Scheme 2 (BSPS2).
“FSCS is working on the basis that most customers should have been advised to transfer into BSPS2, rather than the Pension Protection Fund (PPF),” it continued. “This is because the Treasury Select Committee paper published in February 2018 indicated the majority of customers would have been better off if they had transferred into BSPS2.”
The FSCS said the FCA methodology was “complex” and used a number of actuarial assumptions. For example, personal pension charges should be deducted from the pre-retirement discount rate up to a maximum of 0.75% per year. The lifeboat fund said it wanted to obtain more information on fees.
It continued: “These customers have been treated badly by Active Wealth, and FSCS wants to ensure everyone is compensated for the negligent advice they received. That said, FSCS has decided that it should follow the FCA’s methodology, which applies industry-wide and not just to former members of the British Steel scheme.
“In FSCS’s discussions with customer representatives to date, it has been acknowledged that FSCS is correctly following the FCA’s methodology – but that the methodology results in some customers receiving less compensation than they were hoping for. FSCS will continue to engage with customers to ensure that it provides as much help as it can.”
‘Not in a position to select benchmarks’
Rush was pleased to hear the FSCS was “prepared to listen”, and noted the lifeboat scheme was merely interpreting rules given to it by the FCA. He said there were circumstances, however, where the PPF would have been a better option than BSPS2 for the steelworkers and, as such, the FSCS was not in a position to decide which benchmark should be selected.
“In some specific circumstances, such as if the member wants to take early retirement or a tax-free lump sum, PPF compensation can be better than BSPS2,” he explained.
“Given that those factors depend on member preference, the FSCS is not in a position to state which benchmark should be selected, especially as many who have transferred out have already retired early and who, demonstrably, wanted low-risk investments.”
Rush acknowledged the rules were meant for efficiency, but could mean some lose out. “The cruellest irony of all might be that a process designed to compensate for an industrial operation might, in itself, disadvantage and discriminate through being just as industrial in nature,” he added.
The FSCS also revealed it has paid out £138,000 on steelworker-related claims, which is just one-quarter of the £531,000 it has paid out to in relation to Action Wealth since its liquidation in February.