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Regulatory overhaul of transfer analysis is needed

This article is part of
Guide to pension transfers post-freedoms

Regulatory overhaul of transfer analysis is needed

Regulatory guidelines on certain aspects of defined benefits pension transfers have also come under scrutiny, with some elements still being works in progress.

In its 55-page policy statement: Proposed Changes to our Pension Transfer Rules, The Financial Conduct Authority (FCA) said it would consider whether there was a need for a “full review” of its transfer value analysis requirements.

It said: “We appreciate the requirements were established when the only option within a contract-based scheme was to purchase an annuity.”

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The statement also acknowledged some respondents were “concerned about the relative expense of obtaining advice from a pensions transfer specialist when the value of the benefits to be transferred is small.

“In some cases they pointed out the new legislation only required transferring schemes to check a member has recieved appropriate independent advice where the value of the member’s safeguarded benefits exceeds £30,000.”

However, even as late as April this year, in its Pension reforms – feedback on CP15/30 and final rules and guidance policy statement, the FCA still had not committed to policy options over TVAS.

The transfer value analysis (TVAS) is the amount of money a client’s scheme would pay to another pension arrangement in lieu of the benefits they have built up in the scheme, if they decided to transfer.

The calculation relies on a numerical figure on the yield to provide an equivalent estimated pension, projected to the normal retirement date.

A monetary value is then placed on this - the amount of ‘pension fund’ needed to meet the projected level of benefits that has been estimated.

This ‘future value’ is then discounted back to when the transfer value is calculated to arrive at a current value, which is termed the ‘transfer value’. These are usually valid for three months.

When is TVAS needed?

Transfer Value Analysis (TVAS) is required on:

Transfers of safeguarded benefits (except GAR’s) to flexible benefits

Transfers from DB to Occupational DC schemes

Transfers from DB to personal pension and stakeholder schemes

Pension conversions, including immediate vesting

DB to PP/SHP, even where it’s for immediate crystallisation, before NRD.

Transfer Value Analysis (TVAS) is not required on:

GAR’s to flexible benefits

Transfer of DC schemes without safeguarded benefits

Switches between personal pensions without safeguards

DB to PP/SHP for immediate benefit crystallisation at NRD

Source: PruAdviser

According to The Pensions Regulator’s Guidance on Pension Transfers, the legislation provides for the calculation of an initial cash equivalent (ICE) which is then adjusted if necessary to arrive at the final cash equivalent transfer value available to the member to transfer.

The ICE must place a value on the member’s accrued benefits together with any options and discretionary benefits that the trustees decide should be included.

However, currently, the covenant, funding risks and benefits of flexibility, as well as the better death benefits available under DC schemes are not factored into the TVAS. Neither is the fact that post-pension freedoms, the normal retirement date is less relevant.