I always enjoy judging the Money Marketing awards, as I learn about leading businesses and meet new contacts. Last week, we discussed with those shortlisted in the paraplanner category what their involvement with pension transfers is.
I was surprised to hear there are so few providers that will offer suitability reports and transfer value analysis with the compliant numbers. In the 1990s, there were dozens of transfer value analysis system providers available to my IFA firm, including most of the big brand personal pension providers. Today, you can count the number of TVAS providers available on one hand.
In order to meet the demand for those wishing to transfer both defined contribution and defined benefit pension funds there needs to be more choice for advisers. This is especially true when it comes to the transfer numbers, particularly the critical yield (the rate at which the plan needs to grow by each year to normal retirement age to purchase an equivalent annuity).
The only big brand pension provider that offers a free TVAS appears to be Prudential. There are two other TVAS providers that are well used by advisers and they are both technology companies. However, some senior commentators claim these companies offer TVAS services that are not fit for purpose.
I normally comment in these pages that there is too much choice for advisers. We are seeing leading firms move to restricted status and I understand the reasons for this, as a restricted range of products may result in the same outcomes for around 95 per cent of clients than if the advisers had remained independent.
Less product choice also makes advisory firms more cost effective, as there are reduced research costs and less time needed to maintain provider to adviser relationships. But pension transfer services is a relevant area with great consumer demand and advisers need more choice when it comes to who they use.
Consultancy CTC estimates the average vesting pension from a DB scheme is £120,000 and from a DC scheme £40,000. There are three million active members of funded DB schemes (nine million if deferred members are included). Currently, everyone with a DB scheme worth over £30,000 needs to take regulated financial advice if they wish to transfer, so the FCA recognises quality advice is crucial. Further regulatory guidance is due soon from the CP15/30 final rules.
According to Apfa, calculating the transfer value and critical yield in every single case is neither necessary nor relevant. It says it is more important to base transfer advice on individual circumstances, including the primary reason a client wants to leave one scheme in favour of another. I agree with this comment because while we have artificially low gilt yields the critical yield can be too high and unrealistic.
As TVASs before pension freedoms took the assumption an annuity was always purchased, this made the numbers easier to produce. With the advent of the freedoms TVASs needed to change to provide drawdown numbers. We have had the freedoms for over a year so why have previous TVAS providers not re-entered the market? If you want to be a respected technical pension provider you should offer a compliant and consumer friendly TVAS.
Kim North is managing director at Technology and Technical