The power to settle financial complaints.
The power to settle financial complaints.
Free-standing additional voluntary contribution (FSAVC) schemes became available from 26 October 1987.
FSAVCs are similar to personal pension policies – but can be used by members of an occupational pension scheme to increase their pension provision.
The FSAVC arrangement is separate from the occupational pension scheme. The consumer pays contributions – net of basic rate tax – directly to the product provider. Higher-rate tax relief, where appropriate, can be claimed from the Inland Revenue through the consumer’s tax return.
FSAVCs are generally money-purchase arrangements. This means that contributions are invested – and grow with investment returns to produce a fund on retirement that must be used to provide retirement benefits.
How much the consumer receives depends on:
In contrast, in-house additional voluntary contribution (AVC) arrangements are run by the employer. Under this arrangement, the employer deducts contributions from the consumer’s salary, before deducting tax from the salary. This means that higher-rate tax payers receive full tax relief immediately.
Before 6 April 2006 people could contribute up to 15% of their salary and other pensionable benefits (for example, a bonus from their employer) to their occupational pension scheme, an AVC and an FSAVC.
Since 6 April 2006 the 15% limit has no longer applied. The maximum that can now be contributed to pension arrangements in any tax year is 100% of the consumer’s earnings – up to a maximum (for example, the maximum for the 2011/2012 tax year is £50,000). There is also a “lifetime allowance” limiting the total value of all pension arrangements that an individual can accumulate.
Until the introduction of stakeholder pensions, FSAVCs and AVCs were the two alternatives for members of occupational pension schemes to make additional pension provision.
But following the introduction of stakeholder pension plans on 6 April 2001, an individual member of an occupational pension scheme could contribute to a stakeholder pension, provided that they earned less than £30,000 a year and were not a controlling director.
The market for FSAVCs decreased after 6 April 2001 and most product providers have now withdrawn from it.
Up to 25% of the fund can be taken tax-free from a stakeholder pension – although before 6 April 2006 tax-free cash could not be taken from FSAVCs.
From 6 April 2006 any member of an occupational pension scheme has been able to contribute to a personal pension, regardless of the amount that they earn. This means that FSAVCs don’t offer anything that personal pensions don’t offer – and in fact, the charges are likely to be higher.
From so-called “A Day” (29 April 1988) – when investment regulation began under the Financial Services Act 1986 – all occupational pension schemes have had to provide AVC arrangements.
This requirement was removed from 6 April 2006, because there was no longer any need for employers to offer them – as all occupational pension scheme members could contribute to a personal pension.
But many employers have continued to offer low cost in-house AVC arrangements.
In-house AVC arrangements can be:
The employer may meet some or all of the costs of in-house AVC arrangements, and commission may not be paid on the contracts when they are taken out. The economies of scale and lower distribution costs of AVCs mean they almost always have lower charges than FSAVCs.
These are similar to FSAVCs. But instead of having an individual policy and paying contributions directly to the product provider, the consumer pays contributions to their occupational pension scheme provider. These are invested for them in a fund.
As with an FSAVC, the fund is used to buy an annuity, or to provide a tax-free lump sum and a reduced annuity. All of the fund from an AVC started before 8 April 1987 may be taken as tax-free cash.
Under these arrangements a consumer pays contributions (normally expressed as a percentage of salary) to buy a number of “added years” in the scheme.
Following the closure of many private sector final-salary pension schemes, relatively few employers now provide this option – and a cheaper alternative has now replaced it in many public sector pension schemes as well.
The rules and requirements relating to FSAVCs and AVCs have varied over time. The Personal Investment Authority (a predecessor of the Financial Services Authority – FSA) issued Regulatory Update 20 in May 1996.
This sets out “guidance on the procedures which members should adopt in advising clients on the relative merits of free-standing (FSAVCs) and in-scheme additional voluntary contributions (in-scheme AVCs) related to occupational pension schemes.”
Before this, financial businesses should have taken account of the relevant rules of the previous regulators, LAUTRO and FIMBRA, which took effect from “A Day” (29 April 1988).
The LAUTRO Code of Conduct stated that life assurance company representatives should:
So life assurance company representatives should have:
The FIMBRA rules required a FIMBRA-regulated independent financial adviser (IFA) to:
So under the FIMBRA rules, IFAs should have actively investigated the AVC and recommended it, if it was better for the consumer.
Following concerns about pension mis-selling, the FSA required financial businesses to carry out a limited review of FSAVC policies sold between 29 April 1988 and 15 August 1999 – where it was considered there was a high probability of a loss. These policies included:
The main aim was to review the FSAVCs of consumers who might have lost matching contributions or subsidies. However, consumers who were not members of these schemes could also request a review – and financial businesses were required to review those FSAVCs.
If a review was requested before the deadline of 31 December 2001, the financial business should have carried out the review before 30 June 2002.
The consumer should normally have awaited the outcome of this review before making a specific complaint. And any complaint about the review should have been made first to the financial business in question.
In practice, this procedure was not always followed. For example, some financial businesses simply issued a “final response letter” following their review – as if the review was a formal complaint.
Since the deadline of 31 December 2001, consumers can make a specific complaint about an FSAVC – but they are too late to request a review under the regulator’s FSAVC review. Consumers who did not request a review before 31 December 2001 must now use the financial business’s normal complaints procedure.
Under the ombudsman service’s rules, we may “dismiss” a complaint if we decide that the financial business has already reviewed the matter in accordance with the relevant regulations – including, if appropriate, making an offer of redress.
The main complaints we see are where the consumer believes they should have been advised to take out:
We also see complaints about the administration and the sales and marketing of FSAVCs and AVCs.
We do not normally consider complaints about the administration of either FSAVCs or AVCs. But these can be considered by the Pensions Ombudsman – a separate organisation to ours – as set out in our online technical resource, pension complaints: our jurisdiction.
We can look at complaints about the sales and marketing of FSAVCs. But we cannot look at complaints about the sales and marketing of AVCs.
In line with the LAUTRO and FIMBRA rules, our position is that:
However, where an IFA recommended FSAVCs, we will not necessarily uphold the complaint. We may decide that FSAVCs were suitable for that particular consumer and so it was appropriate for the adviser to recommend them. This might be the case where, for example:
IFAs also sometimes present other perceived advantages of FSAVCs – for example, the confidentiality of the arrangements, their flexibility and their portability.
We consider carefully whether the consumer in question advantaged by taking out the FSAVC, taking into account the fact that:
In all complaints involving an IFA, we will examine whether the advantages and disadvantages of both the FSAVC and the AVC were clearly explained – and whether the perceived advantages of FSAVCs were weighed against the clear material disadvantage of higher charges.
In the absence of valid reasons why the consumer would still have gone ahead with the FSAVC – and where the AVC has lower charges – we may decide that the consumer would have paid AVCs, if they had received appropriate advice.
This is because cost is the principal consideration in most purchases – and the FSAVC would need to provide a significant advantage to outweigh the higher costs.
Where we uphold a consumer’s complaint that they should have been advised to take out money-purchase AVCs instead of FSAVCs, we will generally tell the business to pay compensation in accordance with the FSAVC review guidance.
But we may use a different basis, particularly if the guidance does not address the actual complaint. We may also decide that no loss has actually occurred.
The FSAVC review guidance was not intended to compensate consumers for losses arising solely from poor investment returns in the FSAVC funds. The loss considered relates to the higher charges paid and (if applicable) the loss of the employer matching contributions or subsidised benefits.
The effect of this loss is calculated by referring to one of two benchmark indices. One is appropriate to a deposit-based AVC. The other is appropriate to non deposit-based AVCs.
Where the consumer is not able to transfer the FSAVC fund into the in-house AVC arrangement, we will make provision for the future difference in charges that may be incurred. We will also take into account the date on which the consumer joined (or could reasonably have been expected to have joined) the AVC – or if they cannot now join the AVC, we will take this into account.
Where appropriate, we may also tell the business to pay the consumer compensation for distress, inconvenience or other non-financial loss.
We see complaints where consumers point to the advantages of “added years” AVCs – and say they should have been advised to pay them.
“Added years” AVCs are guaranteed (insofar as final-salary scheme benefits are guaranteed) – and the benefits are linked to final salary. The link to final salary is particularly beneficial for scheme members who remain in service and see their salary increasing substantially. Benefits on death in service, ill health and redundancy may also be better.
But there are disadvantages to “added years” AVCs. They may represent poor value for early leavers and those who do not see their salary rising substantially. They are relatively expensive and sometimes inflexible.
So we will look at whether the consumer's circumstances at the time of the advice meant they would have paid “added years” AVCs, had they received appropriate advice. Factors we will consider include:
The fact that a consumer has remained in a job and enjoyed good salary increases does not necessarily mean that they should have been advised to pay “added years” AVCs.
As well as the expense and inflexibility of “added years” AVCs, we will also consider how relevant the other benefits of “added years” AVCs were to that consumer – for example, any widow’s and dependants’ benefits.
The cost of buying an added year is fixed by the scheme actuary. They will have wanted to reduce the chance of a strain on the scheme – and so they may have selected a conservative set of assumptions to fix the “added years” costs.
This means that on realistic assumptions, the benefits arising from the money-purchase approach would be greater at retirement. But this is not guaranteed – and recent experience has been disappointing. As the annuity rates available at retirement have become more expensive, this has meant that the benefits on retirement from an AVC or FSAVC policy have been disappointing.
Where we uphold a consumer’s complaint that they should have been advised to pay “added years” AVCs, the lost added years have to be valued. This is explained in FSAVC Review Bulletin Number 3.
Financial businesses should use the assumptions set out in our online technical resource, redress for pension mis-sale cases that fall outside the Pensions Review.
Where appropriate, we may also tell the business to pay the consumer compensation for distress, inconvenience or other non-financial loss.
If we decide that the consumer would not have paid “added years” AVCs, we will not uphold the complaint in full – but we may decide that “money-purchase” AVCs were more suitable than FSAVCs. In these cases we will tell the business to pay compensation in accordance with the FSAVC review guidance.
All the guidance for the FSAVC review is on the FSA website. In particular, FSAVC Review Bulletin Number 8 includes an index of the contents of all the guidance, bulletins and other useful information.
The following information may also be useful:
contact our technical advice desk on 020 7964 1400
This is part of our online technical resource which sets out our general approach to complaints about a wide range of financial products and issues. We would like your feedback on how helpful you found it. Please also use the feedback form below to tell us about anything you think we could clarify or explain better.