The Financial Services Compensation Scheme (FSCS) has called for a review of the £85,000 limit it is able to pay out to people making pension claims, stating that it believes it should be higher.

In its publication The balancing act of compensation, the FSCS noted that while it believed the current compensation limits remained appropriate for most products and activities covered by FSCS protection, pensions was an “important exception”.

“In this specific area we believe that the FSCS compensation limit of £85,000 should be higher,” the FSCS said.

“We would like to see it reviewed, with a view to reducing the gap between FSCS’s limit and the amount that the Financial Ombudsman Service can tell a business to pay, which is £375,000 as of 1 April 2022.”

It noted that a ‘key difference’ between pension claims and other claims made with the FSCS was the level of ‘uncompensated loss’, where they money the FSCS can pay out to customers was less than the total amount they lost due to the current compensation limit.

“For pensions advice claims, including pension transfers, the rise in uncompensated loss has been far steeper, and the average uncompensated loss per customer far greater than the average across all claim types,” the report stated.

The total number of claims where the customers loss was more than the relevant limit was almost 3,600 in 2021/22, with this figure “steadily rising” over the past six years in a period that has resulted in just under £1bn in losses not being paid back to customers in compensation.

Commenting on the report, AJ Bell head of retirement policy Tom Selby said: “The FSCS provides hugely valuable protection for savers and investors in the event the firm they have trusted with their cash goes to the wall.

“This compensation scheme is not only vital in helping those who face financial disaster – it also gives people confidence their hard-earned savings will be safe even if the worst were to happen.

“That over £1bn of losses have gone uncompensated due to the £85,000 cap in the past six years sounds shocking on the face of it, with roughly half of those uncompensated losses linked to pensions advice. Given the scale of uncompensated losses, the FSCS understandably wants to see the pensions compensation cap increased above £85,000.

“However, the FSCS faces a delicate balancing act as the funds used to pay compensation come directly from financial services firms via an annual levy. In 2022/23 that levy is expected to be £625m, and any increase in the pensions compensation cap would inevitably increase the pressure on the overall levy.

“If the compensation limit for pensions were to be increased, this should be as part of a broader review of how the FSCS is funded.

“As things stand, good firms doing the right thing by their customers are forced to fork out for huge FSCS levy bills in order to compensate the wrongdoing of a few bad apples. Where firms are found guilty of wrongdoing and are fined by the FCA, this money goes straight to the Treasury.

“There is a strong argument for using money from FCA fines to pay compensation to customers. This would be a genuine ‘polluter pays’ model that could be used to both boost compensation to customers and lower FSCS costs to the rest of the industry.”

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