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FSA confirms pension transfer crackdown

The FSA has confirmed changes to the way pension transfers are calculated in a bid to make it more difficult for advisers to recommend an investor quits their defined-benefit scheme.

In February, the regulator outlined plans to change the way pension transfers from defined-benefit to defined-contribution schemes are calculated in a move expected to prevent benefits being undervalued by up to £20bn.

FSA director of conduct policy Sheila Nicoll (pictured) says: “In the vast majority of cases someone in a defined-benefit pension scheme will not be better off transferring to a personal pension.

“The new assumptions will make it tougher for advisers to make the case for a transfer. As a result of these new rules, we would expect the number of pension transfers to decrease, leaving pension scheme members better off.”

The final rules contain amendments to the way advisers must value peoples’ benefits when analysing a pension transfer.

The original consultation recommended advisers use an RPI-linked annuity rate when undertaking transfer value analysis for CPI-linked benefits. However, the FSA says a “significant” number of respondents were opposed to this because it would overvalue the benefits members would be giving up.

The regulator has now decided to allow CPI-linked benefits to be valued using a CPI-linked annuity rate instead. It says this will more accurately reflect the benefits members would be giving up.

The FSA has also withdrawn a proposal to value LPI-linked benefits in the same way as RPI increases. RPI-linked benefits will continue to be valued using RPI-linked annuity rates.

The FSA will issue a consultation on how CPI and LPI-linked benefits should be valued later this year.


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There are 3 comments at the moment, we would love to hear your opinion too.

  1. At last they have finally come up with something that is sensible and that will actually be of benefit to the vast majority of consumers. It has only taken them 12 years so to do, still better late than never. They dont need to worry much though, seeing as how there is unlikely to be enough advisers left in a few years to make it worth while exercise.

  2. Surely another answer would be to make the DB schemes give more realistic transfer values?

  3. There are a number of implicit assumptions built into this strategy that may not all stand the test of analysis.
    Let’s step back a stage to the Pension Misselling Scandal. The vast majority of this was over a decade ago, and again based on a lot of unstated assumptions. So has anyone, e.g. the FSA, completed a review of the assumptions made at the time and their correlation with current outcomes. Has anyone looked at the benefit of remaining in DB schemes, especially those that have folded, with the benefits of transferring. Are there instances of people who stayed, against advice and are now worse off etc.
    Have the FSA used this ongoing monitoring to inform and ameliorate their own range of operational assumptions? If the squeak I heard was a no, then how do they build and adapt their regulator model assumptions.
    Given the risk levels built into the continuation of DB schemes has the FSA provided a working model to assess that possible future eventuality.
    The whole of the FSA thinking appears to be based around a zero sum world were outcomes can be neatly packaged. I have no problems with models that provide good quality guidance, but in a variable world good quality guidance does not equate to accurate guidance. Rather it means providing sufficient information on which a client came make a reasonable decision, accepting that nothing is perfect. The problem is that the FSA want perfection, and thereby ensure that clients are provided with a set of calculations that would frighten Einstein, and do bemuse clients and advisers alike.
    I first devised software at the end of the 1990s that outlined a risk range for clients, based on a realistic set of assumptions, at that time. Those assumptions have changed so often through legislative and economic circumstances that the original expression of possibilities is now probably a worthless fiction. What I didn’t think to do was to record fact and fiction throughout the years to see whether clients were better off or not. That, of course, would also have included monitoring the exited DB scheme.
    Without such information we are all basically whistling in the dark, because we have no record of correlation between advice and fact. I suspect the FSA may also be whistling out of tune!
    And Steve makes a very valid point. If the transfer value on offer does not provided a realistic option to move then it cannot be a realistic assessment of the value of the members benefits. Since the Treaty of Rome defines these benefits as salary, is this not a theft of salary rights. If there is a materially detrimental outcome to the member who wishes to transfer out, using consistent assumptions, then there is something wrong with the assumptions. And that is were the FSA and the Government should be looking. Otherwise the member is being deprived of the right of choice, and that cannot be a correct outcome.

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