Personal Pension  

Warning misleading transfer values distorting DB advice

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.

“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.