View more on these topics

Jason Wykes: Transfer value comparator confusion

The new calculation to be used when advising on DB transfers is riddled with dangerous uncertainties

It has been over a month since advisers have had to start including a transfer value comparator when advising on a defined benefit pension transfer.

In its consultation last year (CP17/16), the FCA said consumers did not understand the value of the benefits being given up from DB schemes and felt the TVC was a more “in your face” approach to highlighting this.

It is meant to be a very prescribed calculation with the stated expectation that, whatever pension transfer analysis system the adviser used, it would produce a consistent figure.

As a firm which has been involved in TVAS software since 1992, we knew that was an unlikely outcome. Different software copes to different degrees with being able to model the wide variety of DB schemes.

You would assume a good starting point would be to have clear parameters and assumptions to use in the TVC calculation laid out within the rulebook.

Alas, that has not happened, primarily due to the way it has been implemented by the FCA.

The lowdown on new DB transfer value analysis rules

Those of you who followed the process will know the entire premise of the TVC (along with the assumptions used) changed considerably from the initial consultation paper to the final policy statement (PS18/6) issued in March this year.

But whatever we think of the TVC, it is here to stay, and we need to focus on implementing the new rules. So, what are the main areas of concern?

1. Normal retirement age
Prior to the introduction of the TVC, it was clear a TVAS was not required when a member had already passed the scheme’s normal retirement age and was retiring immediately.

Instead, the adviser would follow the process for a member considering a transfer within 12 months of NRA – namely, obtain the current scheme pension and compare against an annuity, which could be purchased with the cash equivalent transfer value, based upon the client’s circumstances.

COBS 19 Annex 4B lays out when a TVC is required:

  • 1R covers “retail client has 12 months or more before reaching normal retirement age”;
  • 2R covers “retail client has less than 12 months before reaching normal retirement age”.

COBS 19 Annex 4B does not cover a scenario when “retail client has passed a normal retirement age”.

We have been informed by some that the FCA has stated a TVC would be required for late retirement.

What is the proposal where a scheme does not actually allow late retirement? Instead, when the member asks for their scheme pension, the actuary assumes the member retired at NRA and works out the various back payments due.

2. Spouse’s pension
PS18/6 clearly states the TVC should include the value of a spouse’s pension, regardless of the member’s current or future marital status.

However, nowhere in COBS 19 does it tell you to include the value of the spouse’s pension in the calculation.

Nic Cicutti: Time for advisers to get rid of contingent charging

The closest to any such instruction is reference within the notes to show on the TVC printout which states “… that income (including spouse’s benefits) …”.

In addition, when calculating pension annuities, COBS 13 says to use the spouse’s gender and year of birth if known, but the FCA has written to a few advisers and software companies stating that, for the TVC, you should always assume a female is three years younger. Presumably, we are to assume the spouse is the opposite gender to the member?

And what about schemes where married members may not receive a spouse’s pension, as the rules are based upon only paying to the spouse at date of leaving the scheme, not the spouse at date of death? For the record, this is not that unusual.

3. Discount rate
The discount rate is detailed in COBS 19 Annex 4C 2R(2) and states “must be based on the fixed coupon yield on the UK FTSE Actuaries Indices for the appropriate term”. That might sound clear, but it is not. Questions include:

  • What date do you obtain the fixed coupon yields?
  • Which of the various fixed coupon yields should you use (for example, zero to five years or zero to 10 years for a term of three years)?
  • How do you apply the 0.75 per cent assumed product charge?

All these points will impact on the resultant figure but the rules are silent.

4. Misleading note
Finally, the notes on the TVC printout were clearly not updated between the consultation and the policy statement.

Adrian Boulding: State pension age equalisation is far from equal

It currently states: “2. The estimated replacement value takes into account investment returns after any product charges that you might be expected to pay”.

This is completely inaccurate as investment returns being assumed are “no risk” gilt rates and the product charges are generic and not what that client might be expected to pay.

I would suggest a better text would be: “2. The estimated replacement value assumes a low ‘no risk’ investment return of X per cent per year and assumed product charges of 0.75 per cent per year”.

Jason Wykes is managing director of O&M Pension Solutions



Scam claims managers ordered to wind down

Two fraudulent companies that claimed to be able to recover funds for people who had lost money in alternative investment schemes have been ordered into liquidation by the High Court. Asset Recovery Associates Limited was incorporated as a private company in July 2011. The linked company, Asset Recovery Resources Limited, was incorporated the following December. […]


Lifetime allowance 2018/19 increase confirmed but pensions absent

The Government has confirmed that the lifetime allowance 2018/19 will rise in line with inflation, but savers have been offered little else in the Autumn Budget. The lifetime allowance will increase from £1m to £1,030,000 to match CPI from 2018/19.  Though the maximum amount the can be saved each year into a Junior Isa or […]


Nutmeg launches full advice service

Online investment manager Nutmeg has expanded into personalised advice with the launch of a new pilot service. The robo-adviser, which was one of the first to enter the market, has levied a staunch criticism of the cost of traditional advice as it says it will offer “tailored financial advice” with “personal recommendations and qualified financial […]


Paul Lewis: Banks must step up efforts on scam prevention

New rules mean banks will have to take more responsibility for fraud protection. But is it enough? Last month, the police reporting service Action Fraud tweeted: “2019 will not be a happy year for fraudsters.” It was referring to a new initiative where banks will check the name of the payee before transferring money to […]

How to use wills to protect your clients’ wishes

March was Free Wills Month! Free Wills Month brings together a group of well-respected charities to offer members of the public aged 55 and over the opportunity to have their simple wills written or updated free of charge by using participating solicitors in selected locations around England and Wales. Research by the Law Society* highlighted that only 64 […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers. Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and thought leadership.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm