Not long ago, if a client had asked a firm to help them transfer from a defined benefit pension scheme, most would be turned away.
The introduction of pension freedoms has turned that trend on its head, with many firms now fearing that not considering a DB transfer would result in a client complaint further down the line.
What of the reports suggesting that, while high, the critical yield is irrelevant? This could be as a result of recent FCA guidance published on occupational pension schemes which states: “We would expect the firm to consider the likely expected returns of the assets in which the client’s funds will be invested relative to the critical yield. The firm should also consider the personal circumstances of the client before making any personal recommendation, taking into account other specific factors as they apply to the client.”
The message appears to be that the critical yield figure is not the be all and end all; that you have to take into account the client circumstances and objectives as usual. But it is not saying that the critical yield should not be considered altogether. Basically, advisers must have a healthy respect for the figure.
The Financial Ombudsman Service continues to put great focus on the critical yield figure as a starting point for occupational pension scheme transfer complaints.
The FOS also maintains the client must fully understand the guarantees being lost on transfer and in turn why they wish – or need – to give up a guaranteed income for life, which provides indexation and a spouse’s pension.
So it goes without saying the critical yield must be the starting point of the DB research process. It is vital the transfer value analysis is correct so it generates the right critical yield figure.
From there, the adviser can decide, given the client’s objectives, health and financial circumstances (including attitude to risk and capacity for loss), whether a transfer is in their best interests – even if the critical yield is 20 per cent.
Statements such as “the critical yield is just a number” and “the critical yield does not apply to you” will not go down well in the event of a complaint.
Common errors we see in transfer value analysis reports are:
- Charges (that is, investment, platform and adviser) not being stated
- Incorrect interpretations of revaluation rates
- No reference to step up guaranteed minimum pensions
- No reference to small details such as whether the client is married or not, or attitude to risk.
Early retirement factors are quite often missed too, which is relevant if the client’s objective is to retire before the scheme retirement age.
In some cases, a protected retirement date at age 50 has been shown in deferred statements provided by the trustees.
“Statements such as ‘the critical yield is just a number’ and ‘the critical yield does not apply to you’ will not go down well in the event of a complaint.”
The FCA is due to publish the findings of its Retirement Outcomes Review later this year, which will hopefully update some of the rules and guidance around TVAS reports where necessary.
Until then, however, we are where we are, and advisers need to remain mindful of the importance of the critical yield.
Mel Holman is director at Compliance and Training Solutions