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Pension transfers and conversions, including DB to DC transfers

Author Image The Technical Team
30 minutes read
Last updated on 25th Mar 2019

Overview

We explore the advantages and disadvantages of transferring a Defined Benefit scheme to a Defined Contribution type scheme and the assessment process, including Appropriate Pension Transfer Analysis (APTA) along with its mandatory Transfer Value Comparator (TVC).

The FCA have published several Consultation Papers and Policy Statements since March 2015, to deal with the introduction of Pensions Freedoms and to improve the quality of pension transfer advice. Here is a list of the main publications;

Consultation Paper CP15/7 – Proposed changes to our pension transfer rules, March 2015

Policy Statement PS15/12 –  Feedback on CP15/7 and final rules, June 2015

Consultation Paper CP17/16 – Advising on Pension Transfers, June 2017

Policy Statement PS18/6 – Feedback on CP17/16 and final rules and guidance, March 2018

Consultation Paper CP18/7 – Improving the quality of pension transfer advice, March 2018

Policy Statement PS18/20 – feedback on CP18/7 and final rules and guidance, October 2018

Most changes announced in these publications should now be in place.  Changes coming in to force after time of publishing are:

  • Updated assumptions to use when revaluing benefits, from 6 April 2019
  • Updated pension increase assumptions, from 6 April 2019
  • New PTS qualification requirements, from 1 October 2020.

Key points

  • A pension transfer involves giving up safeguarded pension benefits in return for a cash value which is invested in another pension scheme.
  • A pension conversion involves giving up safeguarded pension benefits in return for access to flexible benefits, or payment of an uncrystallised funds pension lump sum.
  • Firms who wish to carry out pension transfer or pension conversion business must have FCA transfer permissions
  • It is vital that advisers understand the differences between switches, conversions and pension transfers as it drives the whole advice process thereafter
  • Advisers must understand what ‘safeguarded’ benefits are to fulfil regulatory requirements, undertake the advice process properly, and ensure the appropriate process is followed for pension transfers and conversions.

Background

There is a difference between the Financial Conduct Authority (FCA) requirements for advising on a pensions switch, conversion or transfer. Also there are particular HMRC legislative requirements for the process of transferring.

This article focuses on the FCA requirements in respect of a transfer or conversion from an Occupational Pension scheme to a Defined Contribution scheme (including DB to DC transfers).

The HMRC and DWP requirements are dealt with in the Transferring a pension scheme and Additional Protection for Flexible Pension articles.

A pension switch is where a transaction is not within the definition of pension transfer, but involves moving pension benefits from one scheme to another scheme, of the same type. For example, where a retail client is transferring benefits from a personal pension or stakeholder pension scheme where there are no safeguarded benefits (and where there has been no previous transfer from a defined benefits scheme) to another personal pension/stakeholder pension scheme. Details are contained within our Pension Switching article.

For details on transferring to or from an overseas pension scheme please refer to our article on Qualifying Recognised Overseas Pension Scheme.

The focus of the FCA’s requirements is to ensure that individuals switching, converting or transferring their pension arrangements receive the appropriate level of advice, provided by advisers who have sufficient knowledge to ensure the client understands the implications of the proposed action. This is especially important where there is potential for significant consumer harm if unsuitable advice is given to consumers who are considering giving up  “safeguarded benefits”.

All parties involved with these transactions have a duty of care to the client to ensure that clients receive the appropriate advice, as these transactions can have a very significant impact on a client's future financial welfare. Please also see the articles Transferring a pension scheme and Additional protection for flexible pension consumers which you may find helpful.

Following consultation, the FCA issued Policy Statement (PS15-12) addressing changes to the rules on pension transfers, necessary as a result of Pensions Freedom. This  policy statement came into force on 5 June 2015.

This has since been followed up by PS18/6 and PS18/20 as covered earlier.

What is a pension transfer and pension conversion?

According to the FCA Handbook, the definition of a pension transfer is:

"A transaction resulting from the decision of a retail client who is an individual

a to transfer deferred benefits (regardless of when the retail client intends to crystallise such benefits) from:

  • I. an occupational pension scheme
  • II. an individual pension contract providing fixed or guaranteed benefits that replaced similar benefits under a defined benefits pension scheme; or
  • III. (in the cancellation rules (COBS 15)) a stakeholder pension scheme or personal pension scheme

to

  • IV. a stakeholder pension scheme,
  • V. a personal pension scheme; or
  • VI. a deferred annuity policy, where the eventual benefits depend on investment performance in the period up to the date when those benefits will come into payment; or
  • VII. a defined contribution occupational pension scheme; or

b to require the trustees or manager of a pension scheme to make a transfer payment in respect of any safeguarded benefits with a view to obtaining a right or entitlement to flexible benefits under another pension scheme.

Also in the FCA Handbook a pension conversion is defined as a transaction resulting from a decision of a retail client to require the trustees or managers of a pension scheme to:

  • convert safeguarded benefits into different benefits that are flexible benefits under that pension scheme; or

  • pay an uncrystallised funds pension lump sum in respect of any of the safeguarded benefits.

Safeguarded benefits

In the definitions above, the term safeguarded benefits are referred to within both pension transfer and pension conversion. So what are safeguarded benefits?

In the Pensions Schemes Act 2015 (section 48(8)) safeguarded benefits means benefits other than:

  • money purchase benefits, and
  • cash balance benefits.

For the purpose of the above definition a money purchase arrangement is a scheme where the benefit, rate or amount is calculated solely by reference to the scheme assets. As such, for an arrangement to be exempt from the definition of safeguarded benefits, it cannot contain any guaranteed annuity rates or any like guarantees or rates.

Cash Balance Benefits are calculated by reference to an amount available for the provision of benefits to or in respect of the member (“the available amount”) where there is a promise about that amount. The promise includes, in particular, a promise about the change in the value of, or the return from, payments made by the member or any other person in respect of the member.

But a benefit is not a “cash balance benefit” if, under the scheme:

(a) a pension may be provided from the available amount to or in respect of the member, and

(b) there is a promise about the rate of that pension, including:

  • the available amount will be sufficient to provide a pension of a particular rate;
  • the rate of a pension will represent a particular proportion of the available amount.

In other words, a cash balance plan may provide a promised growth rate on the contributions, but does not provide any promise with regards to the rate of conversion of the fund at crystallisation.

Therefore, if the only exclusions from the definition of safeguarded benefits are the above definitions of money purchase and cash balance, any other type of benefit will be regarded as safeguarded benefits, including:

  • Defined Benefit schemes
  • Any guaranteed annuity rate (we cover rules for GARs later)
  • Any deferred annuity rate

In January 2016 the Department for Work and Pensions (DWP) issued the factsheet Pension benefits with a guarantee and the advice requirement (PDF) in which they sought to further clarify the issue of safeguarded benefits. In the factsheet it states that safeguarded benefits are defined in legislation as pension benefits which are not money purchase or cash balance benefits. In practice, safeguarded benefits are any benefits which include some form of guarantee or promise during the accumulation phase about the rate of secure pension income that the member (or their survivors) will receive, or will have an option to receive. These include:

1.     Under an occupational pension scheme, a promised level of income calculated by reference to the member’s pensionable service in the employment of the pension scheme’s sponsoring employer (for instance, under a final salary scheme)

2.     A promised level of income (or guaranteed minimum level of income) calculated by reference to the contributions or premiums paid by or in respect of the member (for instance, under some older personal pension policies)

3.     A promised minimum rate at which the member will have the option to convert their accumulated pot or fund into an income at a future point, usually on the member reaching a particular age (generally known as a guaranteed annuity rate, or guaranteed annuity option).

In November 2017 (and updated February 2018), DWP issued “Safeguarded-flexible pension benefits: simplified valuation and introduction of personalised risk warnings”. One of the key requirements this introduced is for relevant risk warnings to be provided at least 2 weeks before the transfer of safeguarded benefits transaction takes place. Effectively this means such transfers must not be completed within this 2 week period.

Permission required to conduct transfer business

Before we look at Permissions, we should mention the triage process and where this may actually constitute a personal recommendation. By doing a triage where you might identify that a client has no capacity for loss and needs a secured income then by declining to take the case further, this is effectively advice. As such this is a personal recommendation not to proceed.

Triage needs to be restricted to generic, factual information about the advantages and disadvantages of transferring and at no point take into account the client’s personal circumstances. 

Firms who wish to carry out pension transfer or pension conversion business must have FCA transfer permissions. If a firm does not have the relevant permission, they cannot undertake this activity. This rule is driven by amendments to the Regulated Activities Order in April 2015 and means that firms now require pension transfer permissions to be able to transact any pension transfers or pension conversions, even where a firm is not dealing with safeguarded benefits or providing the services of a pension transfer specialist.

Pension conversion includes:

  • Conversion of safeguarded benefits into flexible benefits within the same scheme, and
  • Payment of an Uncrystallised Funds Pension Lump Sum (UFPLS) in respect of safeguarded benefits

This will mean a number of firms who conducted pension transfer/pension conversion business in the past, will no longer be allowed to do so unless they apply and obtain the required permission (this will be checked when an application is received and a case cannot proceed if the firm does not have the required permissions).

For the avoidance of doubt, although the Department for Work and Pensions states that under £30,000 a ceding scheme does not have to ensure that a member has received advice, the FCA has no such ruling. Where an adviser is involved with the transfer or conversion of a pension they need to be appropriately authorised and qualified, irrespective of the value of the pension.

When is a pension transfer specialist required?

The FCA rules require that advice on pension transfers must be provided by, or checked by, a pension transfer specialist and firms wishing to provide advice on pension transfers and pension opt outs must apply for and obtain special permission to carry out that activity. Areas requiring a pension transfer specialist include:

  • Transfer of Defined Benefits to Defined Contribution schemes
  • Transfers of Occupational DC schemes, with safeguarded benefits, to personal pension or stakeholder pension schemes (prior to FCA's Policy Statement PS15-12 it was anticipated that transfers of Occupational DC schemes without safeguards would have also required a PTS, it has now been clarified that this is not the case- although transfer permissions - at firm level - are still required) 
  • Where a client is given advice to opt-out of an occupational pension scheme 
Pension Transfer Specialist

 

Appropriate Pension Transfer Analysis (APTA)

Before APTA - the following information was relevant until 30 September 2018.

Transfer Value Analysis (TVAS) was required on all transfers of safeguarded benefits (except GARs, see below) to flexible benefits, including advice on transfers from DB to Occupational DC schemes as well as transfers from DB to personal pension and stakeholder schemes. TVAS was also required for pension conversions, including when a client sought immediate access to their pension savings.

TVAS was not required on transfers from DC schemes without safeguarded benefits or on switches between personal pensions without safeguards. TVAS was not required where immediate benefit crystallisation happened at the DB schemes normal retirement age, but was required if benefit crystallisation happened before NRD.

APTA

From 1 October 2018, TVAS was replaced with the Appropriate Pension Transfer Analysis (APTA). 

One of the stated aims of the APTA is to help “prove” suitability. It removes the, often confusing, TVAS analysis and replaces this with an APTA which would set out the minimum level of analysis expected for income and death benefits. APTA should detail any “trade-offs” that have to be made for objectives against needs. Part of this process will be the inclusion of a prescribed comparator (TVC – see later) providing a financial indication of the value of benefits being given up.

The regulator has left APTA design mostly at the discretion of the adviser (bar the TVC) to decide how this should look and what should be incorporated . Advisers will be best placed to assess the needs and circumstances of their individual clients.  

In terms of contents this can include:

  • Both behavioural and non-financial analysis, as well as considering alternative ways of achieving client objectives
  • Use of modelling tools, however, advisers should consider the part these tools play in explaining the options to individual clients.
  • Death benefit comparison
  • Overseas transfer comparisons

The APTA could also be used for self-investing clients, although this does not reduce the need for the PTS to fully inform the client on their intended investment choices.

There will also be the following changes to the Handbook text that were consulted on:

  • a new rule requiring advisers to consider the impact of tax and access to state benefits, particularly where there would be a financial impact from crossing a tax threshold/band
  • a new rule to clarify that the APTA must consider a reasonable period beyond average life expectancy, particularly where a longer period would better demonstrate the risk of the funds running out
  • a revised rule requiring advisers to consider trade-offs more broadly and not just income v death benefits
  • new guidance on considering the safety nets – the PPF and Financial Services Compensation Scheme (FSCS) in the UK – that cover both the current and receiving schemes in a balanced and objective way
  • new guidance that if information is provided on scheme funding or employer covenants, it should be balanced and objective

Guaranteed Annuity Rates

There is one significant exception to the above requirements (in terms of the requirement for a pension transfer specialist), and it is where the advice is on conversions or transfers in respect of pension policies with a guaranteed annuity rate (GAR). Although GARs are safeguarded benefits, the FCA have decided not to require these cases to be checked by a pension transfer specialist and as such advice can be provided by an adviser with investment advice permission. This is because an adviser with the investment advice permission, but not the pension transfer and opt out permission, must still prominently highlight the value of the GAR to their client (the firm still needs to hold transfer permissions). The adviser should do this as part of the suitability assessment report for their client.

Pension transfer specialists

Currently a pension transfer specialist must have CF30 (customer function) and hold a qualification from:

  • G60 or AF3 (CII)
  • Pensions paper of Professional Investment Certificate (IFS)
  • Fellow/Associate of Pensions Management Institute
  • Fellow/Associate of Faculty of Actuaries

By October 2020 FCA will require PTSs also hold the level 4 RDR qualification for advising on investments (or equivalent by other existing qualifications and gap-fill exercises) before they can advise on or check pension transfer advice.

Full details of the qualifications accepted are available in the FCA Training and Competence Handbook. The FCA heavily discourage direct offer or execution only in pension transfers and if this is to take place then the firm must make, and retain indefinitely, a clear record that no advice was given.

The FCA Handbook text reflects that they expect a PTS to: 

  • check the entirety of the advice process, not just the numerical analysis, and consider whether the advice is sufficiently complete
  • confirm that the personal recommendation is suitable
  • inform the firm in writing that they agree with the advice, including any recommendation, before the report is given to the client

For any two-adviser models, this means that any disagreements between the PTS and the adviser must be settled before the client is given the suitability report.

COBS requirements

COBS has detailed requirements (COBS 19.2) which must be followed before a pensions transfer specialist can advise on a transfer. The firm has to:

  • compare the benefits which are likely to be paid under the defined benefits scheme with the benefits payable under the PP/stakeholder and give the client a copy of this comparison highlighting factors which support or do not support the firm's advice; and
  • give the client enough information to make an informed decision but also try to make sure that the client understands the comparison and the advice given.

Pensions switching/transfer review

After A Day there was a large increase in the amount of pensions business, especially in relation to switching to personal pensions or SIPPs. In 2008, the regulator decided to carry out a thematic review as they believed that there was an increased risk of mis-selling. The review’s report – the Quality of Advice on Pension Switching - was published in December 2008.

The regulator found that the unsuitability of advice fell into 4 main areas:

  • unjustified additional costs (79% of unsuitable cases);
  • unsuitable investments as not taken account of attitude to risk and individual's circumstances (40% of unsuitable cases);
  • inadequate reviews put in place or the importance of regular reviews was not explained (26% of unsuitable cases); and
  • unjustified loss of benefits from the transferring scheme (14% of unsuitable cases).

In more detail - advice was considered unsuitable by the regulator if the outcome was the customer switching into one of the following:

  • A pension incurring extra product costs without good reason (this outcome involved assessing cases where, for example, the reason for the switch was for investment flexibility, but this was not likely to be used; the reason was fund performance, but there was no evidence the new scheme was likely to be better; or the reason was flexibility of a drawdown option, but there was no evidence that this option was needed).

SIPPs were often recommended even if investment flexibility wasn't wanted or required.

  • A pension that was more expensive than a stakeholder pension, but a stakeholder pension would have met the customer's needs.

However, this does not mean that advising a client to take a more expensive pension contract is unsuitable advice but it means that the extra costs must bring extra benefits.

  • A more expensive pension in order to consolidate different pension schemes, but where the extra cost was not explained or justified to the customer.

As above, a more expensive pension could be justified but the adviser would have to be able to give a detailed explanation as to why it would benefit the member.

  • A new pension and the customer had lost benefits from their ceding pension without these being explained or justified.

If the existing pension scheme has a Guaranteed Annuity Rate (GAR) attached to it, then transferring away from the scheme means they will lose the GAR. A member would need to fully understand the reason why this would be beneficial to them.

  • A pension that did not match the customer's attitude to risk and personal circumstances.

Advisers must take into account not only attitude to risk, but also other factors such as length of time to retirement. Strategies such as life-styling or inclusion of guarantees to coincide with retirement dates helps tailor a plan to the client's specific circumstances.

  • A pension where there was the need for ongoing advice, but this had not been explained, or offered, or put in place.

For example, drawdown arrangements should really be reviewed much more frequently, ideally at least annually, to evaluate fund performance and risk.

Defined Benefit to Defined Contribution transfer

As mentioned above, in many cases it is not appropriate to do a DB to DC transfer, as the safeguarded benefits available in a DB scheme may be difficult to replicate in a personal pension.

A partial transfer of a DB scheme may be possible and in many ways could provide the ideal mix of secure DB benefits to provide for core retirement needs, linked with the flexible options offered by DC arrangements. Unfortunately many schemes still leave members with an ‘all or nothing’ choice. 

However, there are some circumstances where it may be advantageous. The following highlights some of the advantages and disadvantages of transferring a DB scheme, these include: 

  • An employer/scheme may offer an incentive to move from the DB scheme. This may be in the form of an enhanced transfer value. The trustees may seek to do this to reduce the liabilities of the scheme. However, even taking this enhancement into account, it is still often not appropriate to transfer and may even result in the loss of Lifetime Allowance protection.

  • Flexibility: a DB scheme does not offer the same flexibility as a Personal Pension scheme. For example, Income Drawdown is not an option under a DB scheme. Drawdown would give the client the ability to select and change the level of income they draw from their pension, allowing them the opportunity to change their income to meet changing income requirements and perhaps manage their tax liability by reducing liability to higher rates of tax. Under their DB scheme the scheme dictates the income being paid usually without any option to vary. However, by transferring the client would thereafter be taking on the longevity, investment and benefit payment risk which previously sat with the DB scheme.

  • Flexibility as to when the member wishes to take benefits, e.g. the DB scheme may have a retirement age of 65 and will not permit early retirement, other than with the scheme trustees’ or employer’s consent, and say, the client wishes to retire at age 60. Even if early retirement is allowed a significant actuarial reduction may be applied. However, it may be appropriate that alternative short term funding for early retirement (until the DB entitlement is available) should be considered.

  • Flexibility: Within a DB scheme the available tax free lump sum may only be able to be taken, in full, at the point the client takes the benefits from the scheme. Within a DC arrangement the client can decide to phase the payment of the tax free lump sum by only crystallising the portion of the funds required to generate the lump sum required (with associated designation to income product). This ability to take only part of the available benefits may assist in the deferment of any possible LTA charge.

  • There may be potential for a higher annuity through a Personal Pension (for example if the DB scheme pension provides benefits such as spouses/civil partner’s pension and the member doesn’t have a spouse/civil partner, or the spouse/civil partner already has sufficient pension provision). However, clients in this position must consider that their marital status may change in the future.

  • There may also be a possibility of a client accessing enhanced/impaired life annuity rates if they transfer to a Personal Pension. DB schemes do not consider health/lifestyle issues when establishing the level of income to be paid. Enhanced/impaired life annuities provide higher levels of income than standard annuities, reflecting health or lifestyle issues that may have an impact on a client’s longevity. A comparison between their DB benefits and an enhanced/impaired life annuity, which provides a rate of income that reflects a client’s medical situation, may be appropriate.

  • The level of death benefits provided by the DB scheme may not be reflective of the fund value of the scheme if it was transferred (this may be especially marked in deferred DB pensions where, unless there is a dependant, the scheme may only pay a small multiple of the deferred pension (for example 4/5 times deferred pension). However, consideration of alternative protection options (life cover etc.)should be undertaken before giving up the protected benefits in a DB scheme just so that death benefits are increased.

  • Within a DB scheme there is no control of the death benefits, these are paid in line with the scheme rules with little ability for the recipient to manage these payments. After retirement it is likely that the DB scheme will only pay dependants pensions with children and step children that are above age 23 no longer classed as dependant (barring physical or mental impairment). Within a DC scheme, the client can nominate who they would like the death benefits to be paid to. They could nominate their spouse, children or even grandchildren all to receive a share of their death benefits. Although the discretion of who will be paid death benefits usually lies with the trustees of the pension (usually required to keep the funds IHT free), if the client lets them know his wishes (via a nomination/expression of wish) they will take these into account and may reach a decision to follow the clients request. Without a nomination, the trustees are likely to pay all the death benefits to dependants. If in the unlikely event the trustees did elect to pay non-dependent children a portion of the death benefits, if there is no nomination in place, they can only pay a lump sum to non-dependants (such as independent children over the age of 23). Ensuring that clients put a nomination in place (and keep it up to date) is vital. The recipient of a DC death benefit can usually decide to take the benefits as a lump sum, use the funds to buy an annuity, or they can place the funds within a dependants/nominees (and subsequently successors) drawdown. If the beneficiaries elect flexi-access drawdown they can choose if, when, and how much they choose to draw down from these funds. Thereafter, the dependant/nominee flexi-access holder nominates who they wish the funds to be subsequently left to. So, if the funds are left solely to a spouse, there is no control over who they might leave the assets to; they may not leave funds to the original member's bloodline and could possibly leave everything to say a new spouse, with the member’s children receiving nothing. Spousal Bypass Trusts are one way in which this issue can be addressed. Getting advice in this area is vital.

  • Although the tax treatment of DB and DC death benefits on death post 75 is the same, there is a significant difference when death occurs before age 75. On death before age 75 although lump sum death benefits from both DB and DC schemes and income benefits from DC schemes are tax free, income benefits from DB schemes are taxable at the recipients’ marginal rate. The tax treatment and lack of control attached to DB death benefits (as detailed above) will result in the recipient of DB income death benefits paying more tax (and perhaps a higher rate of tax) than could have been achieved within a DC scheme.

    The DB scheme may be in danger of entering the Pension Protection Fund (it is very important that the implications of this and how the PPF works are fully understood.

Disadvantages include:  

  • On transferring from a DB to DC scheme, the client will take on the investment, longevity, income management risk etc. as previously detailed. This also applies to any dependant’s benefits payable from the DB scheme.
  • Transferring clients may become vulnerable to various pension liberation schemes/scams.
  • The method of LTA calculation applied to DB schemes may result in less LTA usage than the post transfer DC scheme.
  • Transferring may possibly lose any LTA protection that the client may have applied/ be eligible for.
  • With control comes responsibilities – the client needs to ensure that they exercise sufficient self-control to manage the withdrawal options they have within a DC arrangement.
  • The protection of the Pension Protection Fund would be lost on transfer of a DB scheme to a DC arrangement. The PPF was established to pay compensation to members of eligible defined benefit pension schemes, when there is a qualifying insolvency event in relation to the employer and where there are insufficient assets in the pension scheme to cover Pension Protection Fund levels of compensation. The PPF provides on-going protection at a level which may provide the client with sufficient retirement benefits.
  • As an opted-out member of the DB scheme the client may lose out on employer contributions between transfer and retirement. They may also lose out on any additional incentives provided to active/pensioner members of the scheme (non-pension e.g. discounts, concessions, Death in Service or memberships?)

Assessing a transfer

The first step in assessing a transfer is to request a "Statement of Entitlement" from the Scheme Administrators. The member can usually request one of these in each 12 month period free of charge. This will provide details of the current benefits payable and the transfer value. The Pension Transfer Specialist adviser must help their client to analyse this, along with their personal needs and financial circumstances. Then, they must carefully document and help the client consider the costs of moving, the potential benefits lost by moving, etc. Only then can they advise the client whether to move from the scheme.

One development worth pointing out here is that PS18/20 introduces the FCA requirement on firms to provide a suitability report regardless of whether or not a transfer is recommended.  FCA believe advising a client it is not in their interests to transfer, and setting out the considerations in reaching this conclusion, needs to be fully documented – although perhaps not as detailed as a suitability report that does recommend a transfer should proceed.

The calculation of transfer values is covered in the Transferring a pension scheme article.

The Occupational Pension Scheme (Disclosure of Information) Regulation 1996 as amended The Occupational and Personal Pension Schemes (Disclosure of Information) (Amendment) Regulations 2015

Insistent client

The FCA has published a factsheet - Pension reforms and insistent clients - providing a reminder of their position on insistent clients, given the pension reforms.

In addition, CP17/16 consulted on how to deal with insistent clients specifically in relation to pension transfers, because insistent clients also feature in areas of advice other than pension transfer advice.

In December 2017, they published PS17/25 which confirmed the addition of Handbook guidance setting out how firms may comply with FCA obligations when dealing with insistent clients. The guidance came into effect on 3 January 2018.

It’s important to note that under these rules it is still the responsibility of the firm to determine how (and if) they should proceed with clients who don’t take the advice given.

TVC

The Transfer Value Comparator (TVC) became effective from 1 October 2018

As part of the APTA (which is mostly left to the advisers discretion as to how best to show the analysis to put the client in an informed position) there will be a mandatory TVC. It is worth noting that the rate of return is not based on the clients likely investment performance. Instead this is based on a “risk free” return from gilts to match the “risk free” nature of the DB income. Firms should also assume product charges of 0.75% and a 4% annuity charge on purchase.

It will be displayed in the following format;

Will I be better or worse off by transferring? 

  • We are required by the Financial Conduct Authority to provide an indication of what it might cost to replace your scheme benefits.
  • We have done this by looking at the amount you might need to buy the same benefits from an insurer.

It could cost you £140,000 to obtain a comparable level of income from an insurer. 

This means the same retirement income could cost you £20,000 more by transferring.

Transfer Value Comparator

 

This means advisers no longer have to explain a critical yield from a TVAS, instead they must fully inform the client of;

·       the difference between the CETV value and the TVC value,

·       the present discounted value of future cash flows, and

·       the expected growth rate being on a “no risk” basis (as it may be unlikely that a client would invest in gilts over the medium to long term).

TVC is only one element of the APTA to put the client in a suitably informed position. 

Assumptions

Pension Increase Assumptions

Assumptions about increases to the scheme benefits are required for the TVC and when preparing an APTA. CP17/16 sought views on the following:

  • The relative level of the Retail Price Index (RPI) and Consumer Prices Index (CPI) assumptions used to project future benefits (in the TVC) between the date of the employee leaving the scheme and the date on which the benefits commence.
  • The level of the current assumption for certain limited pension increases offered by the ceding scheme. The assumption is needed for the TVC when determining the cost of replicating the ceding scheme benefits in a DC environment. These are pension increases that grow in line with an inflation index, such as the RPI or CPI, but also have both upper and/or lower limits (caps and collars). 

After feedback the Policy Statement confirms advisers should use fixed rates in certain circumstances. Where the collar is above the relevant RPI/CPI rate the collar should be used. Where the cap is below RPI/CPI, the cap should be used. For all other cases the increase should be the relevant RPI/CPI rate.

Revaluation and indexation assumptions- effective from 1 April 2019

The assumptions to be used in an APTA/TVC were consulted on in CP17/16. In essence firms will need to make financial and demographic assumptions to project potential future benefits from the current and receiving schemes.

The key outcome from PS18/6 is the use of the following;

  • Explicit requirements on the charges to be included in an APTA (including the TVC). These will include relevant product, platform and adviser charges. There should also be an assumed allowance of 4% for future annuity charges, as used for KFI projections.
  • Providing guidance on appropriate published population statistics which allow for future mortality improvements, such as those from the Office for National Statistics. (Firms could adopt separate assumptions for women and men.)
  • Changing the rolling annuity interest rate which is averaged over 12 months to an annuity interest rate averaged over 3 months.
  • That any projections of future benefits for the APTA (including the TVC) should be based on a rate of growth, including an allowance for any life styling if appropriate for the client’s personal circumstances, including their attitude to risk.
  • Providing guidance that these rates should be no higher than the intermediate rate of growth shown on a corresponding Key Features Illustration (KFI) for the receiving scheme. 

Standardising these assumptions is expected to lead to better ongoing understanding of the process.  

FSA Consultation Paper CP12/4 on Pension Transfer Value Analysis Assumptions - February 2012 and Policy Statement PS12/8 dates 27 April 2012

The FSA and now the FCA have been concerned since 2009 about enhanced transfer value exercises where employers with large DB schemes offer members the ability to transfer their benefits from the DB scheme to a personal pension. A transfer value is offered normally with an incentive. The FCA agree with the Pensions Regulator's view that that a transfer offer is likely to be suitable for a minority 'and, very possibly, a small minority' of members.

This consultation paper and subsequent policy statement aimed to make sure that independent financial advisers give the appropriate advice to the individual members, taking account of their circumstances

© Prudential 2019