One of the unintended consequences of introducing pension freedoms has been a remarkable increase in the number of people contemplating – and completing – transfers from defined benefit (DB) schemes to personal pensions.
This was somewhat predictable. The transfer values on offer were eye-wateringly high thanks to lower gilt yields, and the benefits of moving to a personal pension environment were tantalising, especially given the ability to pass on unused funds on death. The ‘canteen chatter’ whispering culture that built up among employees was addictive.
The FCA has an active interest in this area, and is taking action in a number of different ways. As well as collecting better data on transfer numbers by asking personal pension schemes to report how many DB transfers they accept, it is also stepping up its supervisory work and taking a keener interest in visiting firms active in transfer business.
It is also updating its handbook to introduce new – or more robust – rules for advice on pension transfers. The regulator recently published some new rules, as well as launching a consultation on some other areas.
The key points from these two documents are:
Pension transfer advice is a personal recommendation
Most advisers were working on this basis anyway, but it’s also significant the FCA has retained the starting position that a transfer is not in the best interests of the client. It is up to the personal recommendation to either back this up or prove otherwise.
The pension transfer specialist (PTS) has to be involved
The PTS is responsible for signing off the entirety of the pension transfer advice – not just the analysis figures. They therefore must be kept involved and be aware of the destination of the pension funds and the proposed investment strategy.
The analysis is changing from October
Instead of the old transfer value analysis (TVAS) rules, advisers will need to supply an appropriate pension transfer analysis (Apta) which demonstrates the suitability of the personal recommendation. This can include behavioural analysis as well as figures. It needs to compare client outcomes and to take into account the impact of the transfer on state benefits and the tax implications.
As well as the Apta, the advice has to include a transfer value comparator (TVC) which compares the transfer value with the cost of buying the same benefit offered by the scheme through a defined contribution annuity. This cannot be personalised for the client and has to use standard assumptions, including a growth rate in accumulation that is ‘risk-free’ (in other words based on gilt yields).
Contingent charging may be banned
The FCA has responded to increasing scrutiny of DB transfer advice charges by consulting on whether to remove contingent charging. However, it is grappling with how to do this. This is because there are two different advice points – the advice on the transfer, and advice on where the money is being transferred to and related investment plans.
If the FCA removes contingent charging from the advice on the transfer, it worries whether some advisers will simply backload most of the overall cost of the advice onto the destination and investment advice charges. It is also concerned such a ban will mean more people struggle to access advice.
The FCA’s work is not yet done
As well as contingent charging, the FCA is consulting on a host of other things. It wants to set out more clearly how PTSs and advisers should be working together, and is also asking if a PTS should hold a minimum level 4 investment qualification.
It believes any triage service offered by advisers should be on a non-advised basis, and therefore not based on the client’s personal circumstances.
Finally, the FCA wants transfer risk to be assessed separately from investment risk, and so has proposed what an assessment of the client’s attitude to transfer risk should include – for example the risks and benefits of both staying in the scheme and of transferring.
In an area where discussions are moving quickly, it pays to be aware of the FCA’s latest thinking.