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Dealing with new FCA rules on pension transfers, conversions and opt-outs

ATEB Consulting’s Steve Bailey looks at what is expected in respect of the FCA’s latest rules on pensions transfers effective this month

FCA Policy Statement PS 18/6, issued in March 2018, introduced some new rules relating to advice on pension transfers, conversions and opt-outs. Some of these came into effect on 1 April 2018, and a few will come into being on 6 April 2019. The purpose of this article is to act as a reminder that some important changes to rules are effective from 1 October 2018.

Rules effective from 1 October 2018

The biggest apparent change is the replacement of TVAS reports by the Appropriate Pension Transfer Analysis (APTA) and Transfer Value Comparator (TVC).

The APTA does appear to have the potential to be more client friendly and easier for advisers to explain and clients to understand. It will include a TVC as replacement for the much maligned Critical Yield. The TVC is basically a comparison of the transfer value with the cost of buying an annuity in the UK market at scheme normal retirement date. The TVC is intended to give the client a clear indication of whether (s)he will be better or worse off after transfer – the annuity can generally be expected to cost more.

The comparison is more generic than the TVAS/CY reports in use currently and will be using a ’risk-free’ growth rate assumption to be a fair comparison with the ‘risk-free’ nature of the safeguarded benefits.

Comparisons should take full account of all charges that the client would incur following a transfer except for:

• adviser charges paid by a third party (e.g. an employer); and

• adviser charges that would be payable whether the pension transfer or pension conversion happened or not (non-contingent charging).

The comparison must contain prescribed notes where the client is more than 12 months away from the DB scheme normal retirement age (NRA) and a different set of notes where the client is within 12 months of NRA.


Both main providers of TVAS software, SelectaPension and O&M, have updated their software to meet the standards required of APTA, including the FCA prescribed TVC comparator. We are pleased to note that both have added TVC to the reports and retained critical yield rather than replacing it. TVC is essentially only a different way to present critical yield and both have a valuable part to play in ensuring that clients understand the value of their DB scheme benefits and the financial implications of transferring out. With O&M the TVC comes first and early – with SelectaPension, it comes after the yield figures and quite far through the report.

Firms that, in the past couple of years, have questioned the value of critical yield figures in the brave new world of pension freedoms might baulk that it has not disappeared but we believe smart firms will build both critical yield and TVC into their advice process.

Other comparison software is available – or was! Most other TVAS software was available through a few pension providers. Most of those have now been withdrawn owing to the inducement rules. One company is still offering comparisons to advisers but the report is now charged for so avoiding the inducement problem – but not the independence and conflicts problems if the transfer ultimately goes to that provider.

Suitability Reports

Any information in the Suitability Report relating to the PPF, FSCS, scheme funding level or employer covenant must be ‘fair clear and not misleading’ and presented in a balanced and objective manner.

This is intended to prevent advisers using scare tactics to influence the client to transfer. If a firm does not have specialist knowledge in assessing the impact of these factors, it should consider not including the information.

If presenting any indication of future performance prepared using a financial planning tool, for example a cash flow model, that uses different assumptions to those shown in the key features illustration for the proposed arrangement, the report should explain to the retail client why different assumptions produce different illustrative outcomes. And there remains a requirement for those assumptions to match the prescribed assumptions as the mid-point.

In any case, as at present, the growth rates used must be consistent with the reasonably expected performance of the proposed funds and also with other factors such as inflation.

Straightforward actions

Although the introduction of APTA and TVC appears to be a major change, it is essentially quite straightforward. For transfer cases dealt with from 1 October 2018, firms just need to do an APTA (with TVC) where prior to 1 October a TVAS was required, and on the same bases of scheme NRA and any earlier age that the client indicates is a desired retirement / draw benefits age.

Suitability reports will need to be amended to reflect an accurate explanation of the TVC and what it means.

Having the TVC format alongside the critical yield should make it easier for advisers to explain, and ensure that clients understand, the implications of transferring out of, or remaining in, the DB scheme.

FCA concerns

We would just caution that, as you will have read in the trade press and FCA publications, the regulator remains concerned about the transfer advice sector, with a high proportion of cases the FCA has reviewed being found unsuitable.

The new rules could be a useful catalyst for firms to review their transfer advice processes.

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