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Are advisers over-reliant on critical yields for pension transfers?


Defined benefit transfer advice processes should be overhauled as too much emphasis is placed on critical yields, advisers argue.

Specialist pension transfer advice firm Tideway says it is “deeply concerning” advisers are relying on critical yields – which pinpoint the investment returns needed to match the benefits offered by the existing scheme.

Tideway partner James Baxter says transfer value analysis reports that produce critical yields of 10 per cent or more are leading to advisers recommending against transfers and boosting the number of insistent clients.

He says: “Tideway saw over 600 transfer offers from 70 plus different schemes in 2015, some quite poorly funded, and I don’t think any of them required a gross return target of more than 10 per cent per cent to match the scheme benefit to beyond age 100 using flexible drawdown.”

Intelligent Pensions technical director David Trenner says: “Tideway is right to point out slavish adherence to the annuity critical yield could result in poor advice. However, I am concerned that firms such as Tideway, that do not charge a fee unless a transfer takes place, may lean towards transfer.

“This means that if the client does not transfer, they do not get paid, and this conflict of interest could lead to a gung-ho approach to transfers that may not be in the client’s interests.”

But Baxter says: “There is a conflict of interest but we disclose it at the start. Once clients understand they only pay if the transfer goes through, they are much happier and we don’t put any sales pressure on anyone to transfer. If you go to a car dealer they won’t recommend you buy a bicycle; it’s impossible not to have a conflict of interest – it’s a question of making conflicts clear and upfront.”

Dobson and Hodge director Paul Stocks says it is not surprising advisers focus on critical yield as it is “the only bit of a DB pension you can quantify”, but he warns that investment returns are not a common reason behind a transfer.

Stock says: “When you factor in the genuine reasons people might be looking at transferring – such as health concerns, the pension freedoms, or not having a spouse – you cannot quantify those things. The critical yield is the risk indicator, while other things are soft facts that you take into account as part of the advice.

“If a client came along and said they wanted to transfer because they were targeting maximum income over their life, you would be at pains to look at anything other than critical yield. But that is not normally why they want to transfer.”

Thameside Financial Planning director Tom Kean says advisers should use all the tools available without placing emphasis on any one in particular.

He adds: “Transfer value analysis, attitude to risk, cashflow modelling, illustrations – if you were to bank on any one of those, you would be on a sticky wicket.”

The FCA is due to report back on a consultation that includes plans to reform transfer value analysis.

As part of this, it said the starting assumption that transferring out of a DB was the wrong thing to do needed to be reconsidered.



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There are 5 comments at the moment, we would love to hear your opinion too.

  1. I’m not active in the DB Transfer market so I bow to the greater knowledge and experience of those who are. However, in assessing whether or not to transfer, there has to be a fundamental benchmark indicator against which to set all the other factors. A required Critical Investment Growth Rate (why is it called yield?) of anywhere near 10% p.a. seems to me to be extremely high and must surely take a lot of justifying. If memory serves, highly optimistic (and unattained) CIGR’s as the basis of a number of transfer recommendations are what got Heather, Moor & Edgecumbe into deep sherbert. Cashflow modelling is like trying to forecast the weather for the next ten years. And don’t even think about the view of an FOS adjudicator should the client complain.

  2. Critical yields should reflect the actuary’s determination of investment return. Perhaps the starting point for investigation is to ask why the actuaries are basing their calculations on unrealistic investment returns. I would bet my house that they do not set the main scheme calculations so high when determining its liabilities.

  3. Paul Standerwick 15th April 2016 at 3:59 pm

    Julian Stevens – the CY is not particularly relevant, if the client doesnt want to purchase an annuity on retirement date etc etc
    There are myriad of other factors which could be more important, its totally subjective. The vast majority of clients wanting to exit DB, are not looking to do so to try and exceed a CY, in my experience.
    The most common reason i have come across is clients wanting to be able to maximise potential benefits paid to children.
    The problem is the FOS concentrate on the CY, that is why advisers do, they have to justify their recommendation, knowing this is the approach the FOS will take – because they dont understand and have very poor/basic knowledge in this area.
    In order to change the approach of advisers, fundemental reform of the FOS is necessary.

  4. Julian
    For one thing, the CY for anyone other than those in “normal” health is complete fiction anyway.
    I had two cases last year where members were looking to take immediate benefits: the CY in one case was in excess of 50% and the other around 15%. The case with a 50% CY, when medically underwritten, resulted in the client receiving an extra 50% PCLS by transferring and a pension from the residual fund equal to the full pension without commutation being offered by the scheme! To say he and his wife are delighted that he transferred would be an understatement.

  5. Of course advisers focus on critical yield – this is what the FOS will focus on.

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