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The lowdown on new DB transfer value analysis rules

Transfer value comparator and appropriate pension transfer analysis to replace much-maligned TVAS report in October

The latest instalment in the long-running debate around defined benefit transfers was revealed by the FCA just before Easter. It was the response to the consultation it ran last summer.

However, the landscape has changed since that point, with the British Steel Pension Scheme making headlines late last year, resulting in the FCA getting a mauling from the work and pensions select committee.

This led to a shift in some of the FCA’s original positions, as well as it launching a further consultation on some thorny issues, such as contingent charging.

The policy statement includes a variety of measures. Some of these came into force almost immediately at 1 April, such as requiring a personal recommendation. Others, including changes to revaluation and indexation assumptions, take effect from April 2019.

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But the meat of the changes come into force from 1 October, when we will see the much-maligned transfer value analysis report replaced by a combination of a transfer value comparator and an appropriate pension transfer analysis. Or, because we love acronyms in pensions, what will forever be known as the TVC and Apta.

Transfer value comparator

The TVC is a mandatory requirement. It compares the transfer value offered by the scheme with the estimated value needed to replace the client’s DB income through the purchase of an annuity in a defined contribution scheme.

Crucially, this estimated value does not take into account any of the client’s personal circumstances such as marital status, health or the age at which they want to access benefits.

In most cases, the estimated replacement value will be more than the transfer value – often considerably so when the transfer takes place years before the normal retirement date.

A key factor why is that the investment growth basis uses gilt yield returns, while also assuming a 0.75 per cent annual charge in the accumulation phase. For example, the 15-year gilt yield is currently around 1.7 per cent, so for someone 15 years from normal retirement date, once the assumed charge is taken into account the transfer pot in the DC arrangement is illustrated to grow at less than 1 per cent a year.

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In addition, as part of the annuity calculation at normal retirement date there is a 4 per cent charge, which is intended to replicate the product and advice costs of buying an annuity.

So, at first sight, customers may be scared off by the TVC, but it is important to stress the FCA does not want it to be the sole focus of advice. And that is where the Apta comes in.

Appropriate pension transfer analysis

The Apta will be personalised to each customer’s needs and objectives. The FCA will not provide detailed rules on what is and is not in the Apta but there are a number of items which need to be included. These include personal details, such as marital status, health, client objectives and needs, which will help position the TVC in relation to the client’s individual circumstances.

The FCA wants a number of other factors covered within the Apta, including tax, access to state benefits and charges for product, investment and adviser.

Advisers must document alternatives, such as the cost of a protection policy if death benefits are a key driver. Death benefits need to be assessed on a fair and consistent basis. For example, helping clients understand the relative value of lump sum and income-based death benefits, and considering how these values may change over time.

For this, and all other areas, the Apta must consider a reasonable period beyond normal life expectancy. And that feels right. If someone is going to give up the certainty of a lifetime income, they should understand the risks of the funds running out under the alternative option. Running analysis to age 100, or even more, is likely to be suitable.

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Some of these areas may appear obvious but it is worth remembering that in the two reviews the FCA carried out only around half of the transfers were shown to be suitable.

Against this backdrop, documentation is key to demonstrate advice is robust, detailed and personalised to the client’s individual circumstances.

All of this is a fundamental change to the advice process around final salary transfers. Having said that, it does not alter the basic premise that many people wll be better off retaining benefits in the DB scheme.

I hope these new rules will help advisers demonstrate that transfer cases are being judged on their own individual merits, rather than as part of an industrialised process. And hopefully these new requirements will also help people understand the value of good advice – whether that is to transfer or not.

Andrew Tully is pensions technical director at Retirement Advantage



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  1. One aspect not mentioned ever in the suitability for a client is the client’s personal requirements. E.g. for the FCA to say 50% of cases were unsuitable were judged by just looking at files? Were the clients asked personally what their personal drivers were? E.g. one example whereby a case for the 1st time client’s specific reasons is to own their own home via access to cash via CETV. Some clients are willing to understand and make an informed decision about the risks of their actions.

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