Aviva Section 32 Buy Out Policy · CAS-37372-V4C1

CAS-37372-V4C1

Ombudsman’s Determination Applicant Mr Y

Scheme Aviva Section 32 Buy Out Policy (the Policy)

Respondent Aviva

Complaint Summary Mr Y has complained:

Summary of the Ombudsman’s Determination and reasons

1 CAS-37372-V4C1 Detailed Determination Material facts

The Policy was originally held with Norwich Union. Norwich Union subsequently merged with Aviva. Hereafter, in this Determination, Norwich Union will be referred to as Aviva.

Mr Y commenced the Policy on 25 July 1986. He was previously a member of an occupational pension scheme. Following advice from a financial adviser who was not affiliated with Aviva, Mr Y transferred his occupational pension scheme benefits to the Policy. The Policy has a GMP available at State Pension Age (SPA). The total transfer-in payment Aviva received was £6,489.41.

When Mr Y commenced the Policy, the ceding scheme’s trustee provided Aviva with an unverified date of birth for Mr Y of April 1958. Mr Y’s selected retirement age (SRA) was set as April 2021 (age 63) for the Policy.

In April 2013, Aviva wrote to Mr Y and informed him that he may not have enough funds in his Policy to allow him to claim his retirement benefits before age 65 (the 2013 Letter)1. Aviva also informed Mr Y that if that were the case, it would write to him approximately 10 weeks before his SRA to let him know.

On 18 April 2017, Aviva sent Mr Y an anniversary certificate (the 2017 Certificate). This document not only informed Mr Y that Aviva was unable to declare any regular bonuses to his Policy that year, it also stated:

“Your future pension benefits include Guaranteed Minimum Pension (GMP) rights, which means that the future pension benefit payable at age 65 will not be less than the GMP. Taking benefits earlier or transferring to another provider will only be possible if the fund value is sufficient to provide the GMP at age 65.”

In July 2018, while considering his options, Mr Y requested a CETV illustration of his benefits from Aviva. In the same month, Aviva received a birth certificate from Mr Y.

On 2 August 2018, Aviva emailed a CETV illustration to Mr Y. This informed Mr Y that the CETV of his benefits was £81,676.97.

On 6 August 2018, Aviva wrote to Mr Y to inform him that its records had been updated with his correct date of birth.

On 21 August 2018, Aviva wrote to Mr Y, following a query from him concerning the Policy. Aviva said:

“Your policy was set up to provide 8.5% escalation a year on all benefits. However, under a Section 32 policy there is no legal requirement to provide

1 Aviva initially provided a copy of this letter which did not have Mr Y’s correct address. Aviva subsequently provided a copy of the 2013 Letter that had Mr Y’s correct address. 2 CAS-37372-V4C1 escalation on GMP Benefits accrued prior to 6 April 1988. Where the retirement fund is insufficient to secure the GMP, any escalation is removed.

Section 9 of the policy document (the Policy Conditions)…refers to the increases applicable. I have highlighted the last sentence which explains any escalation will be removed to secure the GMP.”2

On 28 August 2018, following a request from Mr Y’s independent financial adviser (IFA), Aviva sent the IFA an illustration of the CETV of Mr Y’s benefits. The illustration showed the CETV at the time was £82,023.17.

On the next date, Aviva wrote to the IFA and informed him that the cost of securing the GMP was £120,603 and until the CETV was greater than the GMP cost, it would not be possible for Mr Y to transfer his benefits.

On 31 August 2018, following Mr Y’s request, Aviva sent him an illustration of the retirement benefits he could get at age 62 and 11 months from the Policy. This illustration showed that the value of Mr Y’s Policy at retirement could be £96,800 and that he could get an annual pension of £5,6003. It said:

“We can’t predict what your pension fund might be when you retire because it depends on how well the investments do. But to give you an idea we can show how different investment growth rates could affect the retirement income you eventually get. These are examples, not maximum or minimum amounts – and the value of your pension fund can go up or down and may be worth less than what has been paid in.

This illustration shows what you might get back at retirement in ‘today’s money’, which means they take inflation into account. Seeing the figures in this way shows you what they could be worth today. It’s important to note that inflation reduces the worth of all savings and investments…”

On 6 September 2018, following a request from the IFA, Aviva sent the IFA an illustration of the benefits Mr Y could get at age 65.4 This illustration explained that at age 65 the Policy would provide Mr Y with a GMP of at least £5,978.96 per annum. The CETV of Mr Y’s benefits was stated as £82,083.17. The value of Mr Y’s benefits at retirement was estimated to be £94,800 and showed that at age 65 Mr Y could get an annual pension of £5,330. Aviva said:

“One or more of the projected fund values are currently unable to secure the statutory Guarantee Minimum Pension benefit, which is the amount(s) shown

2 Section 9 of the Policy Conditions is detailed in the Appendix. 3 The illustration was based on no further contributions being made into the Policy. It used investment growth rates of -1.20%, 1.80% and 4.70% and annuity rates of -0.50%, 1.50%, 3.50%. It also included details of the assumptions that had been used. 4 This illustration was based on Mr Y making no further contributions into his Policy and used the same investment growth and annuity rates as the 31 August 2018 illustration. 3 CAS-37372-V4C1 on the first page. Therefore, any additional increase or guarantee period may not apply.”

Subsequently, Mr Y made a complaint to my The Pensions Ombudsman (TPO).

On 29 June 2020, TPO requested Aviva’s formal response to Mr Y’s complaint.

Subsequently, Aviva provided to TPO, copies of correspondence it had sent to Mr Y between April 2013 and March 2021. It informed TPO that the CETV of Mr Y’s benefits as at 18 January 2023 was £110,629.29, and the cost to secure the GMP was £102,006.84. It also said that its actuarial team had confirmed that the GMP would not be covered if it added 5% escalation.5

5 Aviva said the GMP cost without escalation is £102,006.84 out of a fund of £110,629.29. 5% escalation would push the GMP cost up to a lot more than the value of the Policy. 6 Mr Y provided copies of pages 1-4 and pages 7-20 of the 2021 Illustration to TPO. 4 CAS-37372-V4C1 Adjudicator’s Opinion

Poor investment returns since his Policy met the GMP target

5 CAS-37372-V4C1

Summary of Mr Y’s post Opinion comments

7 Mr Y highlighted on the Original Illustration and the 2001 CETV, the sections that he believes shows that he was entitled to a 5% increase annually on his Policy. 6 CAS-37372-V4C1

8 https://www.pensions-ombudsman.org.uk/sites/default/files/decisions/PO-2269.pdf

7 CAS-37372-V4C1

Ombudsman’s decision Mr Y has referenced the case of Harris as he believes his complaint is identical to Mr Harris’. Mr Harris’ case concerned Aviva not allowing him to claim his benefits at age 60 as the value of his policy was insufficient to cover the GMP (which would be payable later, at state pension age).

9 By way of just one example, PO-13991, a decision made by my predecessor, also does not uphold a complaint made against Aviva in respect of the escalation rate to be provided on a Section 32 Policy. 8 CAS-37372-V4C1

9 CAS-37372-V4C1

Dominic Harris

Pensions Ombudsman 16 October 2023

Appendix

“9. INCREASES IN PENSION

Pensions purchased under Condition 7 shall increase at the Escalation Percentage Rate specified in the Second Schedule. If an Escalation Percentage Rate is not specific the Insured may elect that the pensions purchased shall increases at a percentage rate not exceeding 8.5% 10 CAS-37372-V4C1 compound per annum. The increases in pension shall apply from each anniversary of the Benefit Date or the Substitute Benefit Date. This is subject to the amount of the pension per annum being limited to the Maximum Pension or Maximum Widow’s Pension as appropriate increased by the accumulated increase in the Retail Prices Index published in the calendar month preceding the month in which such anniversary occurs since that published in the calendar month preceding the month in which such anniversary occurs since that published in the calendar month preceding the month in which the Benefit Date or Substitute Benefit Date occurred or by 3% compound per annum whichever is the greater less on the case of a pension payable to the insured the pension equivalent of any case sum taken at the Benefit Date or Substitute Benefit Date under Condition 10. If the value of the Retail Prices Index is not published in any particular month the most recently published value will be applied.

The rate of increases in pensions shall not be such that the pension and widow’s pension which can be purchased by the Capital Sum shall be less than the Guaranteed Minimum Pension and the Guaranteed Minimum Widow’s Pension respectively.”

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