Outdated TVAS needs to be part of wider DB transfer reform
There needs to be a wider overhaul of the entire DB transfer process, following the FCA’s reform of Defined Benefit transfer redress, says Mike Morrison, pension expert at AJ Bell
While updating the assumptions used to calculate redress for those who have received unsuitable DB transfer advice, as laid out last week by the FCA, was absolutely the right thing to do, it is addressing a problem after it has occurred rather than trying to fix the problem in the first place.
As well as updating those assumptions, there needs to be a much wider review of the whole DB transfer process and in particular the Transfer Value Analysis (TVAS) assumptions that underpin the advice being given.
This is more important now than ever because a perfect storm of employers keen to reduce the ongoing cost of DB schemes, the Trustees of DB schemes wishing to de risk and low gilt yields producing record high transfer values has resulted in significant growth in the number of DB schemes being considered for transfer.
The TVAS assumptions used to assess the appropriateness of DB transfers were introduced in 1994 and have not been changed for at least a decade. The whole process is outdated and needs to have the underlying assumptions revised. The significance of a critical yield needed to match annuity purchase at the normal retirement date of the scheme seems less relevant today, particularly as many people will opt for income drawdown.
Those figures are no longer the only factor. Individuals particularly keen to take benefits from an earlier age or in a more flexible way may place a high value on accessing the pension freedoms.
The death benefit regime under DB rules is also so much more restrictive than under DC, particularly in these days of the non-nuclear family where beneficiaries might not be dependent.
FCA rules still stipulate that an assessment of DB – DC transfers must start with the assumption that it will not be in the client’s best interests. This now feels outdated in the post-pension freedoms market and at a time when many DB schemes are in deficit.
At the very least I would like to see the TVAS rules and procedures updated or, better still, the regulatory presumption that such transfers are always unsuitable removed. Then all cases can be considered on their merits and in line with the client’s circumstances, without advisers having to keep one eye to their back.
The answer in the majority of cases is still likely to favour the guaranteed benefits of a DB scheme but there may be cases where more flexibility can deliver a better outcome for the client.