Regulation  

Pension transfer rule costs four times original estimate

Pension transfer rule costs four times original estimate

The Financial Conduct Authority has admitted that it has greatly underestimated the cost of advice on pension transfers to allow people to access their pension, stating that the maximum ‘total one-off’ cost could be as much as £1.6m, compared to £340,000 as it originally estimated.

Its policy statement on proposed changes to pension transfer rules, published today (8 June) the regulator reveals a number of revisions as to the costs of applying the new pension transfer rules.

Anyone with a defined benefit pot of over £30,000 needs to obtain regulated financial advice. The regulator confirmed today that this advice will need to be provided by, or checked by, a ‘pension transfer specialist’ with a specific qualification.

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When the FCA previously consulted on this, it proposed that just 45 additional specialists would be needed. Today the FCA confirms that there is a potential need for approximately 130 additional pension transfer specialists.

Other revised assumptions include how long it takes to work on a transfer. Previously the regulator assumed that 7.5 hours would be needed, but it now estimates that the amount of work needed on each transfer might be double this amount.

The regulator also assumed the opportunity cost of an adviser’s time while preparing for qualifications was £29. Again the paper admits the cost of time may be double this.

The regulator adds that also had not estimated further compliance costs related to training or updating procedures. While the regulator said this won’t be incremental, it said that it is likely these will be “significantly smaller” than the pension transfer specialist costs.

Summary of costs and benefitsOne-offOngoing (annual)
Benefits (scenario-based)£5m-£10m
Costs for firms £500,000 - £1.6m
Transfers to firms providing advice (incremental revenue)£2.5m
Transfer from individuals and employers£2.5m
Source: FCA

The regulator’s original paper did not give any indications of “significant on-going costs” for transfers, but now the regualtor estimates this be around £2.5m per year. It says “on the other side of the equation” this also leads to a £2.5m increase for in revenues for firms providing advice.

The cost will be borne by both individuals seeking advice and employers, the FCA explains.

The regulator previously estimated a potential 35,000 individuals would require advice each year which, according to its proposals, would have to be provided or signed off by a pension transfer specialist.

It adds that around 75 per cent of cases would have have to be looked at by a specialist and maintains this assumption. It says the proposals may lead to a further 8,750 cases annually requiring TVA.

Of this figure, 20 per cent will represent chrystallisation at the ‘normal retirement age’, meaning they are exempt from the TVA requirement under a new exemption, therefore just 7,000 cases would lead to TVAs.

The regulator added that its research suggests the cost of a TVA is generally around £200-£250. Adding in a further buffer, the regulator has now upped this to around £350 per case.

donia.o’loughlin@ft.com