The Financial Services Compensation Scheme (FSCS) has recently called for the £85,000 compensation limits to be reviewed for pension claims.

It wants to close the gap between its limit and the amount the Financial Ombudsman Service (FOS) can tell a business to pay, currently £375,000. Our latest insight article looks at the FSCS compensation scheme and what any rise could mean for workplace pension providers, advisers and employers.

In its annual outlook report published in May, the FSCS called for an increase to its £85,000 compensation limit for pension claims.

It said that whilst it believes current limits remain appropriate for most products, it needs to be higher when it comes to all forms of pensions.

The compensation body called for a review of the limit, with a view to reducing the gap between its limit and the amount the FOS can tell a business to pay. This amount rose to £375,000 in April.

The FSCS has seen a steep increase in the level of uncompensated loss it is reporting over the past few years, where compensation it can return to consumers is less than the total they have lost. This is a direct result of the FSCS’s compensation limits.

For FSCS said this rise in uncompensated loss is particularly steep for pensions advice claims.

Simon Wilson, head of resolution at the FSCS, said in the report: “The differences between the types of failure FSCS deals with are stark when it comes to how well we feel we are putting people back on track, and a lot of that is down to our compensation limits.

“In recent years, most of the deposit failures we’ve seen have been credit unions. Very few of their customers were holding more than £85,000 in their accounts, and even if they had been, there is temporary high balance protection there to help in many cases.

“When we declare an IFA in default, we see claims where customers have lost hundreds of thousands of pounds, life changing sums of money that we simply can’t return due to the limits in place.”

The total number of claims where the consumer’s loss was over the compensation limit was close to 3,600 for the 2021/22 financial year. The compensation body claims over the past six years it has resulted in around £1bn of the money lost by consumers not being paid back in compensation.

The FSCS’s compensation limits have been reviewed several times since it became a single compensation scheme in 2001.
When first formed the compensation body could cover £31,700 of funds held in a bank or savings account and £48,000 for investment claims including pensions.

The limit for bank and savings account compensation has risen three times since to £35,000, £50,000 and most recently £85,000.

The investment limit, which applies to most workplace pension claims, has risen twice. First to £50,000 and then to £85,000.

The FSCS said that this does not reflect what is required as now the limit for pensions and investments is the same as most other FSCS limits where losses are most likely to be small.

It also says that whilst the deposit limit has out-paced inflation, the investment limit is “broadly worth the same” as it was in 2001.

Following the Financial Conduct Authority (FCA) giving the Financial Ombudsman the authority to increase its compensation limit regularly in line with inflation after a 2018 consultation, the FSCS argues it is their turn for an increase.
If the FSCS gets its way, what would a rise in its pension compensation limit mean for the workplace pensions industry?

The FSCS is funded via an annual levy which is raises from all regulated financial services firms.

Workplace pension providers could see a rise in the levy they have to pay to the FSCS every year, in order to pay for what would most likely be a higher overall claims cost.
The rise would mean very little for employers, other than the fact their workers would be entitled to higher levels of compensation should things go wrong.

Advisers dealing with workplace pensions would likely see the largest impact, due to the FSCS’s request for the rise largely being driven by complex claims against advisers and SIPP operators. Workplace pension advisers would be likely to see a higher increase to their FSCS levy due to being in the same payment bracket as advisers who offer advice on SIPPs and pension transfers.