The Financial Conduct Authority’s business plan for the year ahead was dominated by reviews of pension rules.
Usually the announcement of yet more regulatory reviews generates moans and groans among advisers but changes to some of the antiquated pension advice rules are clearly much needed.
The FCA’s business plan promised a retirement market review, which will consider the impact of the pension reforms on competition and switching.
The timing of this review will allow integration with the FCA’s ongoing consultation on changes to pension rules and guidance, data collection exercises and the government’s next steps on exit charges and pension transfers.
More than a year after pension freedoms were introduced it is clear current transfer value analysis rules were designed for a world where you had to buy an annuity rather than chancellor George Osborne’s brave new pension freedoms world.
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.
James Baxter, partner at Tideway, 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 a year net of fees and above the scheme pension inflation to match benefits to age 90 using drawdown.
Advisers were swift to point out if proper financial planning is in place, the TVAS would be a small part of the analysis to determine the correct course of action.
But surely, rules which can see your clients quoted a 10 per cent critical yield is grossly misleading and creating problems when it was originally designed to offer clarity for your clients?