The FCA is looking to shake up the way defined benefit transfer value analysis is conducted.
As part of a suitability assessment, advisers are currently required to conduct a TVAS to compare benefits being foregone with benefits available under a new scheme, with the result a critical yield that is needed to match the lost safeguarded benefits.
But the regulator now says following pension freedoms a new overarching requirement to undertake “appropriate pension transfer analysis” which looks at all the client’s options should be introduced.
This, as a minimum, must assess client’s outgoings in relation to income needs, how ceding and receiving schemes will impact upon these, and a fair consideration of death benefits.
In a consultation this morning, the FCA says: “Advisers often focus – in some cases almost exclusively – on the TVAS element rather than making a rounded assessment of suitability based on all relevant factors. In the most concerning scenarios, the TVAS is undertaken first without any knowledge of the client and then made to fit the client’s circumstances.
“In some firms the TVAS is seen as no more than a box-ticking exercise to be completed for compliance reasons.”
The new appropriate pension transfer analysis will also include a set format for how benefits being given up should be valued; what the FCA is calling a prescribed transfer value comparator. This will be based on a calculation involving three points:
- where relevant, a projection of the ceding scheme benefits to normal retirement age
- the estimated cost of purchasing those benefits using an annuity, and
- for those more than 12 months from their scheme retirement date determining the present value needed today to fund the annuity
The FCA says: “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 appropriate charges.
“This discount rate should be appropriate for each client, based on their attitude to risk, irrespective of whether the proposed receiving scheme will involve flexi-access drawdown or an annuity.”
Specialists in the spotlight
On pension transfer specialists, the FCA has urged firms to make sure they have covered a sufficient number of cases under supervision and have current experience, even though their qualifications mean they can give advice without checking.
It says: “Given the complexities of this area it is our view that the pension transfer specialist qualification alone is not enough to demonstrate competence.”
When this relationship to a specialist is outsourced, responsibility for the advice the specialist checks still sits with the adviser giving the overall advice.
The FCA says further consultation on insistent clients will take place in the coming months.