Pension Insurance Corporation plc · DRN-5825748

The complaint Mr F complains about how a deferred annuity policy in his name was set up by Pension Insurance Corporation plc (“PIC”) when his workplace pension scheme was bought out and wound up. He believes PIC made a mistake by treating his preserved pension benefits as defined benefit (DB) rather than as defined contribution (DC). He argues that this led to the deferred annuity policy being set up in error. He’s unhappy that at retirement he will have a fixed, guaranteed income instead of access to a flexible pension pot. Mr F says PIC’s error has caused him a financial loss of around £76,000, including the loss of death benefits and flexible retirement options. To put things right, he wants his deferred annuity policy cancelled and the £145,500 purchase price, plus redress for investment losses, paid into a personal pension of his choice. What happened Mr F’s preserved pension benefits Mr F was a member of his employer’s workplace pension scheme between June 2000 and November 2004. His benefits were preserved when he left the scheme. The central dispute between Mr F and PIC concerns the format of those preserved benefits before the deferred annuity policy in his name was set up in November 2021. Mr F says his employer offered a DB pension scheme but maintains he was never a member of it. He says he was always in the DC section instead. He believes PIC confused the two sections and wrongly treated his preserved benefits as being on a DB basis, which led to the deferred annuity policy in his name being set up in error. PIC, however, says Mr F was a member of the DB scheme and this is why his preserved benefits were secured through the deferred annuity policy. Because this point is central to the complaint, I think it’s important to clarify it before going any further. The documents provided to this service include an October 2018 workplace pension scheme benefit statement addressed to Mr F – before PIC became involved – summarising the preserved benefits he had built up. Amongst other things, the statement showed the following information: • It was titled “Money Purchase Section”, confirming the benefits were recorded under the DC section; • Mr F’s benefits included a minimum pension underpin of £1,348 per year at date of leaving (November 2004), projected to £2,092 per year at age 60 in January 2029, with a projected total pension of £4,283 at age 60. It also noted that the underpin was based on retirement at age 65 and would be adjusted if benefits were taken earlier or later. • His pension account value was £149,300, of which £52,500 was the capitalised value of the underpin. The statement confirmed the transfer value wasn’t guaranteed and could be higher or lower.

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• The trustees were exploring securing members’ preserved benefits with an insurer through a buyout process, and said the benefits secured would be at least equal to the underpin. Mr F was told he could opt out of the buyout process by transferring his benefits to another arrangement beforehand, subject to receiving independent financial advice. As noted, the statement confirmed that Mr F’s preserved pension benefits included a minimum pension underpin. Other correspondence confirms this was a Reference Scheme Test (“RST”) underpin. An RST underpin is a legal guarantee that applied to certain workplace pension schemes that were contracted-out of the State Second Pension between April 1997 and April 2016, which aligns with Mr F’s membership from June 2000 to November 2004. Although his pension was a standard DC pot – where the final value normally depends on investment performance – the law required members in these schemes to receive at least a minimum guaranteed pension. So, if his DC pot wasn’t large enough at retirement, the scheme was required to top it up to reach that guaranteed minimum. In practice, it works as follows: • During active scheme membership: Contributions are invested in a DC pot, the value of which can go up or down. At the same time, the scheme works out a minimum DB-style pension in the background which is revalued annually until retirement. The rate of revaluation applied to the underpin must meet or exceed the statutory minimum set in law. • Retirement: At retirement, the pension scheme compares two values: the member’s DC pot and the capitalised value of their underpin. If the value of the underpin is higher than the DC pot, the member receives only the DB pension with any top-up funded by the scheme, and the DC pot is effectively replaced making the entire pension on a DB basis. If, however, the value of the DC pot is higher, the member receives the underpin plus additional benefits – such as extra annuity income and/or a tax-free lump sum – based on the amount by which the DC pot exceeds the value of the underpin. Summary of events that led to this complaint Between November 2018 and January 2019, the trustees wrote to Mr F at least three times to provide more information about the upcoming buyout process. Each letter told him that, if he took no action, the value of his pension account would be used to buy a deferred annuity policy that would provide a guaranteed income from his retirement date. The letters also warned that this might not be in his best interests. To help Mr F understand his options – including the option to transfer his benefits out at that stage – the trustees confirmed they had arranged free access to independent financial advice if he wished to use it. Mr F didn’t accept the offer of free financial advice in response to any of these communications. In March 2019, the trustees wrote to Mr F explaining that they had completed a market review and bought a bulk annuity policy from PIC to secure members’ preserved benefits. The bulk annuity was a single policy held as an asset of the pension scheme and intended to cover all future pension payments for all members. In April 2019, the trustees sent Mr F a statement confirming that his pension account was valued at £145,500 on 11 March 2019 and that this amount had been used toward the cost of buying the bulk annuity policy from PIC. In July 2020, the trustees wrote to Mr F explaining that, after securing the bulk annuity policy from PIC in March 2019, they had decided to convert it into individual policies for each member as part of the buyout process. The trustees explained that once the process was

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complete, Mr F would hold an individual policy directly with PIC providing benefits secured with the value of his pension account, after which the scheme would be wound up. It confirmed that the benefits provided by PIC would be the same as those previously secured by the trustees, and that Mr F would continue to have similar options – for example, at retirement he may be able to exchange part of his pension income for a tax-free lump sum. The letter also explained that the trustees expected the buyout process and issuance of the individual policy to take around six months. In October 2020, the formal process of winding up the pension scheme began, and in November 2020 the trustees transferred to PIC the responsibility for administering members’ benefits including paying pensions and other benefits. In November 2021, the trustees wrote to Mr F confirming that the buyout process was complete and that an individual policy had been set up in his name. Mr F was sent a policy document that set out the details of his deferred annuity policy. The workplace pension scheme was wound up in 2022. From that point onward, PIC assumed full responsibility and ongoing administration of Mr F’s deferred annuity policy. Mr F’s complaint In May 2024, Mr F complained to PIC about a significant reduction in the value of his pension benefits. He referred to the statement he received in April 2019 that showed his pension account was valued at £145,500 as at 11 March 2019. He said he had recently checked the value of his deferred annuity policy and it was £76,288, which he took to indicate a financial loss of around 50% over five years. Mr F said he never agreed to a deferred annuity policy being set up for him and believed his preserved benefits were always meant to be on a DC basis. He therefore felt the purchase of the deferred annuity policy was a mistake and that he had been treated unfairly. He held PIC responsible for choosing to buy the policy and, as a result, responsible for what he considers to be a significant financial loss. PIC’s position PIC didn’t uphold Mr F’s complaint. It explained that it had no involvement in the trustees’ decision to buy the bulk annuity policy in 2019, nor in the later decision to convert it into individual policies in November 2021. PIC said that the benefits in Mr F’s deferred annuity policy reflect the instructions it received from the trustees and that any dispute about the type or level of benefits should be taken up with the trustees, not with PIC. PIC explained that it wasn’t responsible for communicating with members before the bulk annuity was bought, as only the trustees had the authority to do that. It said the trustees had already informed members several times about the planned buyout, offered options and access to free financial advice and allowed enough time for members to make decisions. PIC only began contacting members once responsibility for the benefits had transferred to it, at which point members could no longer opt out of the buyout process. As PIC didn’t believe it had done anything wrong, it declined to compensate Mr F for the decision to buy the deferred annuity policy, though it did offer £50 for delays in handling his complaint. Our investigator’s assessment Mr F then referred his complaint to us. After reviewing the case, our investigator concluded it shouldn’t be upheld. She found that PIC had acted fairly and that Mr F’s preserved benefits were correctly secured through the deferred annuity policy as part of the buyout process. She explained that the decision to purchase individual policies was made by the trustees,

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not PIC, and she saw no evidence that PIC had acted unfairly. She didn’t think PIC had done anything wrong regarding the deferred annuity policy and felt the £50 already offered for delays in handling the complaint was reasonable. Follow-up and escalation Mr F disagreed with our investigator’s findings and submitted extensive further comments, largely repeating points he had already made. In summary, he believed the investigator had incorrectly focused on the bulk annuity purchase in March 2019 rather than the conversion that led to his deferred annuity policy being set up in November 2021 – he continued to hold PIC responsible for the decision to set up this individual policy and the financial loss he believed he had suffered in connection with this. The investigator considered his additional comments but remained satisfied with her original conclusions. As no agreement could be reached, the complaint has now been passed to me for further review. What I’ve decided – and why I’ve considered all the available evidence and arguments to decide what’s fair and reasonable in the circumstances of this complaint. I’ve considered all relevant laws, regulations, regulatory rules, guidance, standards, and codes of practice, as well as what I believe represented good industry practice at the time. Where the evidence is unclear or conflicting, I’ve made my decision based on the balance of probabilities – that is, by weighing the available evidence and surrounding circumstances to determine what I believe is more likely to have happened. This decision doesn’t cover every point raised by either party. If I haven’t commented on something, it’s because I don’t consider it relevant to the outcome. I’ve reviewed all the evidence carefully, including Mr F’s further comments on the investigator’s view. Having done so, I agree with the investigator’s conclusions and don’t intend to ask PIC to take any additional action. I appreciate this will be disappointing for Mr F, so I’ve explained my reasons below. Format of Mr F’s preserved pension benefits Based on the evidence I’ve reviewed, I’m satisfied that Mr F was a member of the DC section of his workplace pension scheme and that his preserved benefits included an RST underpin – as I’ve explained above, this underpin element of Mr F’s benefits was a DB pension. I’ve seen nothing to suggest his benefits were ever on a DC-only basis, as he’s asserted – the evidence shows the opposite. Decision to set up a deferred annuity policy Trust based pension schemes usually give trustees the power to invest the scheme’s assets in whatever way they believe is in members’ best interests. In Mr F’s case, when the trustees decided to wind up and close the workplace pension scheme, they had a legal obligation to secure his benefits in a way that protected his underpin and ensure he received at least the minimum pension guaranteed using a DB formula – one way of doing that was by purchasing a deferred annuity policy. Mr F has explained that his main concern is the 2020 decision to convert the bulk annuity into individual policies, which led to his deferred annuity policy being set up in

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November 2021. He believes PIC made that decision and should therefore compensate him for the financial loss he says he has suffered. However, I think Mr F is mistaken about PIC’s role. The evidence shows that PIC wasn’t involved in the decision to convert the bulk annuity into individual policies. That decision was made by the trustees and sponsoring employer as part of the buyout process. This is confirmed in a letter dated 2 July 2020 from the trustees to Mr F, which stated: “After careful consideration, following the purchase of this insurance policy [in 2019], the Trustees and the Company have decided to convert this bulk insurance policy (also known as a bulk annuity) into individual insurance policies, which would be held by each of the members of the Plan in their own name.” PIC had no role in deciding to wind up the pension scheme, purchase the bulk annuity policy or convert it into individual policies – and that’s exactly as I’d expect, because those decisions weren’t part of PIC’s responsibilities or role as an insurance company that provides annuity policies. PIC’s role was simply to set up the policies as instructed by the trustees and, once established, to take on full responsibility for administering the deferred annuity policies, including Mr F’s. PIC wasn’t responsible for checking whether a deferred annuity policy was suitable for Mr F. As noted above, it simply followed the trustees’ instructions when setting it up. The decision to use members’ funds to buy individual policies rested entirely with the trustees. Therefore, if Mr F is concerned about the decision to convert the bulk annuity into individual policies, those concerns should be directed to the trustees, not PIC. I’ve reviewed the deferred annuity policy document sent to Mr F in November 2021. I’ve seen no evidence that it was set up incorrectly or that it fails to reflect the correct pension structure or amount – including the RST underpin – as it existed under the original workplace pension scheme. Reduction in transfer value The starting point for this complaint was Mr F realising in 2024 that the transfer value of his benefits had fallen from £145,500 in March 2019 to £76,288 in May 2024. What Mr F is describing is essentially a loss of expectation because the transfer value has reduced. But this “loss” would only crystalise if he actually chose to transfer out and give up his RST underpin under the deferred annuity policy. It’s important to note that changes in transfer value don’t affect the guaranteed income payable to Mr F in retirement. The underpin remains protected, regardless of any transfer value fluctuations. If Mr F keeps his deferred annuity policy, it will provide the same type and level of benefits at retirement as his original workplace pension scheme – including the RST underpin. The underpin is guaranteed and isn’t affected by stock market performance or interest rate movements. If the value of his policy isn’t enough at retirement to cover the cost of providing the underpin, PIC will be responsible for making up the shortfall. Mr F believes he has lost access to a flexible pension pot. That’s not strictly correct. As PIC explained in its response, he can transfer the value of his deferred annuity policy to another provider at any time before retirement. The transfer value will rise and fall over time. He would need independent financial advice if the capitalised value of the underpin exceeds £30,000.

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Conclusion This service aims to put consumers back in the position they would have been in if no error or unfair treatment had occurred. Although I understand why Mr F is worried about the fall in his deferred annuity policy’s transfer value, I don’t think PIC has made an error or treated him unfairly for the reasons already explained. I haven’t seen any evidence that the deferred annuity policy was set up incorrectly or in a way that departed from the trustees’ instructions. For these reasons, I don’t think it would be fair or reasonable to require PIC to pay compensation to Mr F or take any further action in response to this complaint. Like our investigator, I’m satisfied that the £50 already offered by PIC for the delay in responding to Mr F’s complaint is reasonable. My final decision Based on the reasons set out above, my final decision is that I don’t uphold Mr F’s complaint. If it hasn’t already done so, Pension Insurance Corporation plc should pay Mr F £50 compensation it previously offered him for the delay in responding to his complaint. Under the rules of the Financial Ombudsman Service, I’m required to ask Mr F to accept or reject my decision before 21 April 2026. Clint Penfold Ombudsman

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