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FSA gets tougher on DB transfers

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. However, this has been revised to £15bn after the FSA backed away from plans to force advisers to use RPI-linked annuities in all transfer calculations, including where the DB scheme has CPI or LPI- linked benefits.

The regulator has now decided to use the same inflation measure for annuity comparisons as exists in the scheme the member is transferring out of. For example, CPI-linked benefits will be valued using a CPI-linked annuity rate.

The FSA will produce a consultation on this later this year.

Director of conduct policy Sheila Nicoll 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.”

AJ Bell marketing director Billy Mackay says: “It is understandable the FSA focuses on the benefits people give up when they leave a DB scheme but there are other factors, such as death benefits, that people also need to consider.”

The policy statement also updates the mortality assumptions used in a pension transfer to take into account the Testachats ruling, which will require insurance contracts to be priced on a gender-neutral basis from December 21.

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