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Catherine Metcalfe: Everything you should know about the Apta

New rules came into force on 1 October to replace the transfer value analysis

The last year has seen a wave of regulatory consultations and policy statements on pension transfers. The latest, PS18/20: Improving the Quality of Pension Transfer Advice, arrived days after the implementation of rules set out in PS18/6: Advising on Pension Transfers.

On 1 October, the transfer value analysis was replaced with the appropriate pension transfer analysis.

As a reminder, the main output of the TVAS was the critical yield. That is, the annual investment return (taking into account charges) needed for a cash equivalent transfer value to provide a capital sum equal to the capitalised value of the benefits provided by the scheme at normal pension age, or at an age determined by the client. This is no longer a requirement.

Thin red lines: FCA fires final shots on DB pension transfers

However, the FCA believes clients should continue to be provided with an appropriate comparison of the transfer value from the ceding scheme and how much it could cost to purchase comparable benefits in a defined contribution scheme.

This is where the transfer value comparator comes in. Much of the process is unchanged from the TVAS, but the final element is different. Instead of determining the required rate of growth, firms must determine an appropriate discount rate to value the amount needed to reproduce the safeguarded benefits, after charges. The TVC is mandatory and must include:

  • Where relevant, a projection of the ceding scheme benefits to normal retirement date;
  • The estimated cost of purchasing those benefits using an annuity;
  • For those more than 12 months from their scheme retirement date, a determination of the present value needed today to fund the annuity.

The TVC can also reflect the defined benefit pension benefits from different ages, in addition to NRD.

In the way of background, the preserved pension at the date of leaving the scheme is revalued to NRD in line with scheme rules. The revalued pension is then converted to a capital sum using mortality tables and the annuity interest rate assumption set by the FCA.

The annuity rate takes into account the pension commencement lump sum and the value of any death benefits, such as guarantee/dependents pension, plus the rate of escalation in payment, so will include an inflation assumption.

The investment growth rate in the TVC is based on a risk-free return using gilts. The gilt yield is based on the fixed coupon yield on the UK FTSE Actuaries indices for the appropriate term, and product charges will be assumed during accumulation of 0.75 per cent. There is no explicit allowance for adviser charges during accumulation.

The lowdown on new DB transfer value analysis rules

The calculation provides the current cost of replacing the pension available from the defined benefit scheme. This figure is then compared to the CETV. Where a shortfall is identified, this must be clearly explained to the client.

The Apta will need to be personalised to reflect the client’s objectives and circumstances.

In addition to the TVC, it should cover:

  • Enough information for advisers to explain how prioritising any of the client’s objectives may result in trade-offs. For example, if prioritising death benefits, any adverse impact on potential income;
  • An assessment of the client’s outgoings and therefore potential income needs throughout their retirement;
  • Consideration of the client’s risk appetite and ability to manage their investments;
  • The role of the ceding and receiving scheme in meeting those income needs, in addition to any other means available; obtaining an understanding of the client’s potential cashflows;
  • Consideration of the scheme being proposed as a receiving scheme and, where relevant, the underlying investments within that scheme, as well as the way benefits will be accessed. For example, flexi-access drawdown, standard or impaired annuity;
  • Consideration of death benefits on a fair basis. For example, where the death benefit in the receiving scheme will take the form of a lump sum, the death benefits in the ceding scheme should also be assessed on a capitalised basis and both should take account of expected differences over time;
  • Information in relation to the benefits provided by the Pension Protection Fund and Financial Services Compensation Scheme;
  • Alternative means of meeting a client’s broader objectives, such as by using other investments, savings or life insurance;
  • Limitations on the client’s ability to continue to contribute to a pension fund;
  • Tax and state benefits, especially when crossing bands;
  • Consideration of a term beyond average life expectancy to help demonstrate the risk of funds running out.

As a final note, while detailed rules are not provided by the FCA, the adviser must assess the suitability of the recommendation.

Cashflow modelling will certainly help with this but, again, the priority is to present the information in a way in which the client fully understands.

Most importantly, as laid out in COBS 19.1.6, a firm should only consider a transfer, conversion or opt-out to be suitable if it can clearly demonstrate, on contemporary evidence, that it is in the client’s best interests.

This is an extremely complex area of advice. Advisers involved in this space must ensure they fully understand the inputs and outputs of the Apta, seeking further training where required.

Catherine Metcalfe is technical policy consultant at Threesixty



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