Warning misleading transfer values distorting DB advice

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Warning misleading transfer values distorting DB advice

Misleading transfer value analysis reports on critical yields are distorting defined benefit transfer advice, according to pension adviser Tideway.

An update of the firm’s Guide to Final Salary Transfers, recommended TVAS should be replaced by a simpler analysis and a more relevant and balanced critical yield calculation.

Partner at Tideway James Baxter said his firm regularly takes on clients who have already tried to get advice and received a computer generated TVAS report, which has left them struggling to understand the significance of the various quoted yields, graphs and pages of data.

Often a high TVAS critical yield will lead the adviser to recommend members to stay in the scheme, effectively forcing clients down the insistent investor route if they want to transfer, Mr Baxter said.

“Many TVAS reports end up showing 10 per cent plus critical yields which consumers and advisers are interpreting as the target investment return for the pension account post transfer,” he said.

“This is patently not the case and immediately puts an unreasonable negative spin on the transfer option.”

As pension scheme members approach normal retirement age, and especially for those close to their lifetime allowance, critical yields in excess of 10 per cent are a regular output from TVAS, according to Tideway’s research.

However, according to Mr Baxter, given current gilt yields and actuarial factors such return targets make no sense.

He added well-funded schemes show very consistent return targets currently of around 1.5 per cent per annum net of fees and above the scheme pension inflation to match benefits to age 90 using drawdown.

If proper financial planning is in place, the TVAS would be a small part of the analysis that we would use the determine the correct course of action Steve Martin

“Tideway saw over 600 transfer offers from 70 plus different schemes in 2015, some quite poorly funded and I don’t think any of them required a gross return target of more than 10 per cent to match the scheme benefit to beyond age 100 using flexible drawdown.”

“If you are being offered at least 25 times your age 60 pension, which most members are, then a 4 per cent net return plus the scheme inflation matches the scheme benefit without any consumption of the transfer capital.

With inflation measures the Consumer Prices Index at virtually 0 per cent and the Retail Prices Index at 1 per cent, Mr Baxter said this translates to a return of around 5 per cent net of fees, for an indefinitely sustainable pension and a family windfall of the transfer capital.

To quote a 10 per cent critical yield in these cases is “grossly misleading it equates to roughly double the pension give up.”

As such, Mr Baxter believes the only real value in a traditional TVAS report is to highlight the gap between transfer offers and open market annuity costs.

According to Tideway, unless the client has serious ill health it’s very unlikely he or she will be able to purchase a completely matching annuity at normal retirement date using the transfer route.

Additionally, if it is inflation-linked annuity income the client is keen on after retirement and the client is in good health, then it makes sense to stay in the scheme.

However, this is not why most deferred members are looking at their transfer values.

“Most members are looking to capitalise and control a valuable family asset and not lose it on death, or they want to take advantage of flexible access either to accelerate cash flow to them or to be more tax efficient. The last thing they want to do is take the transfer and then buy an annuity. The current TVAS report has little or no value to these individuals.

“Members are wasting money on these reports and it must only be a matter of time before advice based on one is going to lead to a complaint,” Mr Baxter said

As such, Tideway’s management advocate comparing the transfer value to the current cost of annuities for those close to or at retirement age if only to show the value of staying in the scheme if annuity income is desirable.

Steve Martin, chief executive at Cheshire-based Smart Financial said that this was not a new problem.

“TVAS has always been about comparing the DB benefit with the annuity equivalent. A bit like a risk profile, it is only the start of the process of advice not the end and like a risk profile it would be poor advice to not understand the client situation sufficient to give contextualised advice.

“Without wishing to sound like broken record, if proper financial planning is in place, the TVAS would be a small part of the analysis that we would use the determine the correct course of action.”

ruth.gillbe@ft.com