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.