Pension Transfers: Abiding by the rules will never be enough!
It is clear from the recent FCA paper on DB pensions transfers that whatever the final prescribed output to replace TVA looks like, it won’t be enough on its own, says O&M Systems Graham Miller
Since pensions freedoms were introduced in 2015, the world and his wife have been saying the FCA need to get up to date on the pension transfers and now they have. This takes the form of consultation paper CP17/16, which includes the draft COBS rules for advising on pension transfers can be found here.
The first thing you’ll see is a requirement for critical yield and TVA to be replaced by a TVC and APTA. The invention of two new acronyms doesn’t represent a promising start, but stay with me.
Currently, the true value of what’s being given up, is lost within the critical yield result and the document indicates the concept of a critical yield is not widely understood by consumers. Yet advice is being based on the percentage growth rate needed to match a customer’s guaranteed benefits, using something they are unlikely to ever buy!
The extract below shows the format proposed to explain the monetary value of benefits being given up.
As you can see, the way the results are shown will be different, but the comparison with an annuity remains.
When you look at the consultation paper and draft rules, it’s clear that FCA expect to see more, as illustrated below:
When providing advice on pension transfers and opt-outs to a retail client, a firm:
(1) should consider, alongside a numerical analysis, other relevant factors specifically arising from that retail client’s personal circumstances, including trade-offs that may occur; and
(2) should not consider a numerical analysis that appears to support a pension transfer, pension conversion or pension opt-out as a sufficient factor in itself.
So whatever the final prescribed output to replace TVA looks like, it’s clear that it won’t be enough on its own.
Moving on, if we look at just a couple of the minimum requirements suggested by these changes, they include:
• an assessment of the client’s outgoings and therefore potential income needs throughout retirement.
• the role of the ceding and receiving scheme in meeting those income needs, in addition to any other means available to the client – effectively obtaining an understanding of the client’s potential cashflows.
To me these sound like sensible things to be considering even now by retirement income modelling using our O&M Profiler ESP system. It’s easy today to see whether their retirement objectives can be met.
Three closing thoughts:
1. In the past, we saw “greater fund choice” as a reason to move money into personal pensions or SIPP plans. However, in the subsequent thematic review, the regulator saw patchy evidence of clients taking advantage of this wider fund choice. Currently, many transfers are taking place to “access pensions freedoms”, so the FCA are bound to want to see how much flexibility is actually required by each client and whether they access it.
2. The proposed new rules come into force in Q1 2018, but consultation is open until September. Comments on this blog are always welcome, but if you have an opinion on the new rules, the FCA want to hear from you.
3. When you read FCA COBS (as above), you’ll notice that some entries are prefaced by “R” for rule, whilst other have “G” for guidance. I once queried the difference with an FCA employee and he confirmed:
“Rules are rules so you need to abide by them.
Guidance is only guidance, but you should remember who is issuing it!”.
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