DISP App 4.4 Redress calculation

1To complete the redress calculation at Step 3 (DISP App 4.3.19R), a firm must undertake the following computation at the valuation date:

(A) + (B) + (C) – (D) - (E) - (F) - (G) + (H)

where:

1. (1)

   A is the capitalised value of pension benefits which would not yet have been taken from the defined benefit occupational scheme;

2. (2)

   B is the capitalised value of future death benefits before the consumer’s retirement date, to the extent not already included in A, which would have been payable from the defined benefit occupational pension scheme;

3. (3)

   C is the accumulated value of past payments which would have been paid to the consumer from the defined benefit occupational pension scheme between the consumer’s retirement date and the valuation date;

4. (4)

   D is the current value of the DC pension arrangement;

5. (5)

   E is the accumulated value of past benefits paid to the consumer or beneficiary from the consumer’s DC pension arrangement from the retirement date to the valuation date;

6. (6)

   F is the capitalised value of previously secured annuity benefits which will be paid from the consumer’s DC pension arrangement after2 the valuation date;

7. (7)

   G is the value of any increase in SERPS as a result of the transfer; and

8. (8)

   H is the value of any reduction in SERPS as a result of the transfer

1To calculate the value of A in DISP App 4.4.2R(1):

1. (1)

   where:

   1. (a)

      the consumer’s retirement date would have been prior to the valuation date; or

   2. (b)

      a beneficiary would have received benefits prior to the valuation date because the consumer is deceased,

   use the sum of [K x L x M - (N/O)] x P x Q] across all pension tranches; or

2. (2)

   where the retirement date is after the valuation date, use the sum of [K x LA x MA x QA x R x S] across all pension tranches.

1For the purpose of DISP App 4.4.5R(1) or (2):

1. (1)

   K is the annual value of the pension at the date on which the consumer left active membership, split by each pension tranche;

2. (2)

   L and LA are the cumulative revaluation factors for each pension tranche from the date of leaving active membership to the retirement date (including the date of the consumer’s death), where:

   1. (a)

      L is based on known revaluation;

   2. (b)

      LA is based on known and assumed revaluation, where the assumed revaluation is based on the relevant assumptions in DISP App 4 Annex 1 3.1G to 5.1G;

3. (3)

   M and MA are the early or late retirement factor applicable to each pension tranche at the retirement date, determined in accordance with DISP App 4 Annex 1 11.1G and 11.2G;

4. (4)

   N is the assumed pension commencement lump sum which would have been taken from each pension tranche, determined in accordance with the technical guidance at DISP App 4.5.4G;

5. (5)

   O is the pension commencement lump sum commutation factor applicable to each pension tranche, determined in accordance with DISP App 4 Annex 1 11.3G;

6. (6)

   P is the cumulative known pension increases, including discretionary increases, that would have been applied to each pension tranche from the retirement date or the date beneficiary payments commenced, to the valuation date, in accordance with the scheme rules;

7. (7)

   Q is the relevant annuity factor to apply to each pension tranche at the valuation date, taking into account the guidance on relevant annuity factors in DISP App 4.5.1G and made up of the assumptions at DISP App 4 Annex 1, including those relating to:

   1. (a)

      the initial post-retirement discount rate (which allows for the annuity pricing margin) at DISP App 4 Annex 1 7.1, based on the discounted mean term at the valuation date;

   2. (b)

      post-retirement pension increases, as amended by the Black Scholes model at DISP App 4 Annex 1 6.1, where relevant;

   3. (c)

      mortality at DISP App 4 Annex 1 10.1G;

8. (8)

   QA is the relevant annuity factor to apply to each pension tranche at the retirement date, taking into account the guidance on relevant annuity factors in DISP App 4.5.1G and made up of the assumptions in DISP App 4 Annex 1, including those relating to:

   1. (a)

      the final post-retirement discount rate (which allows for the annuity pricing margin and the adjustment for the pension commencement lump sum), based on the discounted mean term at the retirement date;

   2. (b)

      post-retirement pension increases, as amended by the Black Scholes model, where relevant; and

   3. (c)

      mortality assumptions;

9. (9)

   R is the discount factor for the period from the valuation date to the retirement date, based on the pre-retirement discount rate, netted down by product and adviser charges, following the technical guidance at DISP App 4.5.3G and using the relevant assumptions in DISP App 4 Annex 1; and

10. (10)

    S is the probability of survival for the period from the valuation date to the retirement date, using the relevant assumptions in DISP App 4 Annex 1 10.1G.

1To determine the value of B in DISP App 4.4.2R(2), a firm must:

1. (1)

   identify the lump sum and regular pension payments that would be payable on the death of the consumer between the valuation date and the retirement date, based on the defined benefit occupational scheme rules; and

2. (2)

   calculate the present value of the potential payments:

   1. (a)

      using the pre-retirement discount rate, netted down for charges, from DISP App 4 Annex 1 8.1G;

   2. (b)

      allowing for the probability of each payment being made, using the mortality assumptions in DISP App 4 Annex 1 10.1G; and

   3. (c)

      allowing for any pension increases in payment that would be applied to regular payments, using the assumptions in DISP App 4 Annex 1 6.1G.

1To determine the value of C in DISP App 4.4.2R(3), a firm must, for each pension tranche:

1. (1)

   assume the value is zero if the retirement date is after the valuation date;

2. (2)

   if the retirement date is before the valuation date, use the factors K, L, M, N, O and P from DISP App 4.4.6R to determine the level of the pension commencement lump sum and each scheme pension payment which would have been made to the consumer or their beneficiaries;

3. (3)

   adjust each payment to reflect the tax which would have been paid, reflecting the guidance on taxation of past payments at DISP App 4.5.18G;

4. (4)

   apply an accumulation rate to each payment, at the rate specified in DISP App 4 Annex 1 12.1G between the date of payment and the valuation date, allowing for changes in the rate over time; and

5. (5)

   calculate the sum of all the accumulated payments which would have been made.

1To determine the value of D in DISP App 4.4.2R(4), a firm must:

1. (1)

   use the value of all investments and holdings within the consumer’s DC pension arrangement at the valuation date, in accordance with the technical guidance at DISP App 4.5.5G;

2. (2)

   where any payments were made from the DC pension arrangement prior to the retirement date:

   1. (a)

      identify all payments made before the retirement date;

   2. (b)

      apply an accumulation rate to each payment, at the rate specified in DISP App 4 Annex 1 12G between the date of payment and the valuation date, allowing for changes in the rate over time; and

   3. (c)

      add the total of all the accumulated payments in (2)(b) to the value in (1);

3. (3)

   deduct the accumulated value of any contributions and transfers to the DC pension arrangement, allowing for investment returns, not resulting from the pension transfer advice; and

4. (4)

   add on the present-day value of any cash enhancements paid to the consumer in connection with the transfer, in accordance with the technical guidance at DISP App 4.5.5G and using the assumption at DISP App 4 Annex 1 13.1G.

1To determine the value of E in DISP App 4.4.2R(5), a firm must:

1. (1)

   identify all payments from the assumed retirement date to the valuation date, net of tax actually incurred, including:

   1. (a)

      pension commencement lump sums;

   2. (b)

      uncrystallised funds pension lump sums;

   3. (c)

      income withdrawals; and

   4. (d)

      annuity payments;

2. (2)

   apply an accumulation rate to each payment, at the rate specified in DISP App 4 Annex 1 12.1G between the date of payment and the valuation date, allowing for changes in the rate over time; and

3. (3)

   calculate the sum of all the accumulated payments which would have been made.

1To determine the value of F in DISP App 4.4.2R(6), a firm must calculate the value of:

(T) x (U)

where:

1. (1)

   T is the annual value of the annuity income at the valuation date;

2. (2)

   U is the relevant annuity factor to apply to the current level of the secured annuity income at the valuation date, following the guidance at DISP App 4.5.1G and made up of the assumptions in DISP App 4 Annex 1, including those relating to:

   1. (a)

      the initial post-retirement discount rate (which allows for the annuity pricing margin) based on the discounted mean term at the valuation date;

   2. (b)

      pension increases that apply to the secure annuity income, as amended by the Black Scholes model, where relevant; and

   3. (c)

      mortality assumptions.

1To determine the value of any initial adviser charges, firms must:

1. (1)

   calculate the value of all the elements of the computation in DISP App 4.4.2R;

2. (2)

   add the value in (1) to the current value of the consumer’s DC pension arrangement;

3. (3)

   multiply the result by the relevant assumed percentage initial adviser charges in DISP App 4 Annex 1 9.1G;

4. (4)

   where the resulting initial adviser charges:

   1. (a)

      exceed the maximum level for the initial adviser charges in DISP App 4 Annex 1 9.1G, set the initial adviser charges to the maximum level; or

   2. (b)

      fall below the minimum level for the initial adviser charges in DISP App 4 Annex 1 9.1G, set the initial adviser charges to the minimum level.