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FCA eyes DB valuation reform

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Transfer value analysis is to be updated to reflect changing consumer behaviour following the introduction of the pension freedoms, the FCA says.

The regulator is also asking advisers for evidence that professional indemnity insurers are acting as a barrier to dealing with so-called insistent clients.

In addition, it is considering whether its “starting assumption” – that a DB transfer will not be suitable – should be reconsidered.

As part of a wide ranging consultation on its pension rules, published today, the regulator has asked the industry how the rise of ad-hoc lump sum withdrawals and drawdown can be incorporated into how final salary pensions are valued.

Currently transfer value analysis methodology is based on replicating defined benefit pensions in a defined contribution scheme followed by an annuity purchase.

The FCA says: “With drawdown, unlike annuities, there are no guarantees that the income will last a lifetime. Investment returns are likely to fluctuate through the duration of the investment and individuals would have the flexibility to drawdown income as they wish.

“We have also seen the recent development of new annuity products with more flexible options that may not fit well into a traditional TVA.”

There has been growing appetite for transferring out of DB schemes since the pension freedoms were announced in March 2014, which have boosted the appeal of more flexible DC arrangements.

The regulator adds different calculations may be necessary depending on the age and profile of the member.

It is also exploring how analysis should be run where someone wants to cash in their entire DB pension in one withdrawal.

Advisers’ fears over dealing with insistent clients is also noted.

The FCA says: “We would be keen to hear further from advisers on how they consider that our rules could be amended to provide more certainty.

“We would also like to find out more about why advisers consider that professional indemnity insurance acts as a barrier to undertaking insistent client transactions.”

In May, Money Marketing revealed how professional indemnity insurers were refusing to offer advisers cover for insistent clients.

The FCA issued a factsheet for advisers on dealing with clients who go against recommendations in June.

In addition, the regulator will look at whether its “starting assumption” that a transfer out of a defined benefit pension will be unsuitable should be reconsidered.

Read the full consultation here.


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. There is nothing wrong with their starting assumptions, it is up to the client to make a case as to why they should give up guaranteed retirement income. It is the bit that happens next that is the problem as the liability will fall with the adviser if if turns out to be the wrong choice. This then spooks the PI insurers and the market for insistent clients shrinks, defeating the objectives of Pension Freedoms.

    You can look at the ifs and buts and maybes of drawdown and hybrid products, but at the end of the day the client is giving up a guarantee and any outcome that may leave them worse off becomes the liability of the adviser. Critical yields are a reasonable indicator of the possibilty of reduced benefits, but should not be used in isolation.

    I suspect some political pressure being brought to bear here, our answer should continue to be that we will continue to advise clients as to their best interests, and reserve the right not to facilitate any transaction that we believe may be to the detriment of the client. There should then be provision for insistent clients to transfer to a scheme of their choice without adviser involvement, and they would fall outside of regulatory protection.

    The big question is really what is best advice, in the eyes of the adviser it is one thing, in the eyes of the Chancellor and many clients it is something else. All we know is that if it does not work out we pay, so we need a framework which guarantees immunity as long as the correct procedures are followed.

  2. Spot on comments Geoff. I cannot believe the FCA are asking for evidence ref PII being a barrier. You only need look at the PPI catastrophe to see that when the claims come flooding in PII will remove this from coverage.
    Instead of focusing on how to protect everyone from everything regarding pension freedoms, the FCA should keep the current rules to cover those who act on the advice to transfer to ensure it was suitable and none has issue with that. However they should have a very simple framework that says if the advice is No and the client goes ahead and insists on the transfer that they automatically relinquish ALL protection offered. They also need to enshrine this in COB so the FOS cannot use any form of back door tactics to get the client recompense. At the end of all this crap is the fact that advisers get complaints about the advice they gave being unsuitable. In these cases, if the suitable advice was NOT to transfer and the client still insists in proceeding ahead, by definition (and logic) we should be safe from complaint redress as the advice was DO NOT DO THIS. That really should be the end of it but as usual the FCA will not state this case as they always want to leave a back door open for them or the FoS to be able to crawl all over our files to find something, anything in fact that could give them a reason to find in favour of the client. This is regardless of how stupid the client was in going against the advice given.
    If the FCA are so confident that the guidance they have given on transacting for existing clients is so clear and easy to understand that we “should be ok” by following why will they simply not state categorically that any adviser who does that “WILL” be on safe ground and free from any liability

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