Ten issues with DB transfer files and how to solve them

Threesixty managing director Russell Facer looks at how to cover all bases with your DB transfer files

The demand for defined benefit transfer advice and, subsequently, file reviews is massive and rising. We have a daily flow of files looking for review and many contain the same common issues which can be easy to resolve.

If your firm advises on DB pension transfers, you should consider the points below. These will assist in ensuring that client files fully demonstrate the suitability of any recommendation made.

1. Client objectives: Flexibility

Where a “flexibility” objective is noted, the client file should demonstrate a real need for it. Details of any relevant discussions with the client also need to be documented, such as confirming how they expect to make use of the flexibility available.

2. Client objectives: Higher income in the early years of retirement

If a client requires a “higher income in the early years of retirement”, the file should evidence that consideration has been given to their potential long-term care needs and their income need throughout retirement. Providing a breakdown of their current expenditure and expected expenditure in retirement can help to provide a robust audit trail in this regard.

3. Client objectives: Better death benefits

“Better death benefits” are often given as a client objective. In these cases, we expect the client file to evidence that a whole of life plan has been considered, costed and fully discussed with the client. If a whole of life plan is subsequently discounted, the reasons for this should be clearly documented on the file.

4. Cash flow modelling

It is recommended cash flow modelling is used to evidence the potential sustainability of income and provision of death benefits where relevant. Documented conversations with the client regarding the assumptions used in the modelling can assist in demonstrating their understanding of the recommendation.

5. Security of the pension fund

If the client has stated the security of their pension is important, the file should clearly demonstrate how it has been deemed appropriate to transfer out of the DB pension scheme (given that remaining within the scheme is likely to meet this requirement) and confirm details of the discussions held and their understanding of the security being offered by the guaranteed index linked income for life from the DB scheme.

6. Information from ceding pension scheme when early retirement is expected

If the scheme administrators of the DB pension scheme will not provide details of early retirement factors and lump sum commutation figures, written confirmation from them should be retained on the client file. If assumptions are used to calculate the level of pension and lump sum available the file should evidence how these assumptions have been established.

7. Partial transfers

The client file should demonstrate that consideration has been given to securing some, or all, of the client’s income requirements via a guaranteed income source. The availability of a partial transfer of their scheme benefits should be documented on the client file. Where a partial transfer is available and discounted, the reasons for this should be clearly documented and held on the file.

8. Transfer value analysis reports

The TVAS report should reflect all charges that will apply following a recommendation to transfer. The amounts for adviser fees, fund charges, platform fees and product charges should be consistent throughout the client file (i.e. the same figures quoted within the TVAS report, illustration and suitability report). It is recommended the annuity interest rate used within the TVAS report is checked against the current rate (1.3 per cent for October).

9. Revaluation and escalation of the DB pension scheme

All client files should evidence the discussions held with clients at the fact-finding stage in relation to the revaluation and escalation of their DB scheme pension. This helps to demonstrate the client’s understanding of the valuable benefits they will lose if they decide to transfer. The figures used in the conversations should be documented on the file.

10. Suitability reports

We have noticed that hurdle rates are being quoted within suitability reports. We recommend care is taken in the use of these figures. While the hurdle rate can be useful to demonstrate the value of the spouse’s benefits and indexation offered by the DB pension scheme, care should be taken not to dilute the importance of the critical yield figure.

Hopefully you all had time and inclination to respond to the FCA consultation paper on DB transfers which closed last week. If not, the content of this will give you a further indication of the regulator’s direction of travel in this area. The transfer value comparator is an item to watch out for as an alternative way to show clients what they are giving up.

Irrespective of what happens following the consultation paper, this will remain a key area for attention. The numbers indicate clients will continue to demand help and advice in respect of DB pensions and this will continue to be an area high on the agenda for both the PI insurers (they have been burned by pensions in the past) and the regulator (as they cannot afford a pensions scandal).

The value of a good adviser can be clearly shown in this area. Part of being a good adviser is to clearly understand the risks to the client and help articulate what is in their best interests in the long run.

Russell Facer is managing director of Threesixty

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  1. Good article. A lot of this can be abbreviatedited to the client’s objectives need to be genuine

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