Regulatory overhaul of transfer analysis is needed

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.”

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.”

The guidance from regulators on pensions transfers has been scant and rather protracted Carolyn Jones

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.

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.

Mike Morrison, head of platform technical for AJ Bell comments: “Legislation around TVAS is a bit out of date post-pension freedoms.

“The FCA is looking at this though, so we may see some progress.” However, some industry experts do not think the FCA is progressing fast enough.

Carolyn Jones, head of pension product at Fidelity International, says: “The guidance from regulators on pensions transfers has been scant and rather protracted. Although the FCA initiated a detailed discussion in CP15/30 (October 2015), the feedback it provided in April 2016 (PS 16/12) was essentially that it wished to undertake further discussion to understand the issues better.”

Bob Scott, chairman of the Association of Consulting Actuaries, adds: “We call on the regulator to update the FCA’s TVAS methodology - as outlined by the FCA in 2015 - to reflect the more complex set of options under treedom and choice.”

Overseas clients

Department for Work and Pensions legislation requires trustees and managers to check the scheme member has recieved advice from an FCA-authorised adviser before transferring pension benefits where there are more than £30,000 worth of safeguarded benefits.

According to the FCA: “In practice, this means that a non-UK resident seeking to transfer pension benefits overseas will need to seek advice from an FCA-authorised adviser on the implications of proceeding with the transfer.

“As FCA-authorised advisers are unlikely to know the local tax regime or pension rules, non-UK residents seeking to transfer pension benefits will be likely to need to seek advice from both an FCA-authorised adviser and a local (overseas) adviser.

“We have raised this issue, and the potential difficulties and costs it imposes on non-UK residents, with the DWP.

“The DWP has confirmed that it will work with us and engage with the pensions industry to consider whether amendments are needed to ensure the advice requirement operates as intended for non-UK residents.”

We don’t have any insistent clients – where we recommend not to transfer and the client still wants to, our view is we haven’t understood their objectives or they haven’t understood our advice Andrew Pennie

Advisers with expatriate clients, or those seeking to become expatriates, will still need to wait for more clarity over how legislation may evolve to enable them to work in the best interests of clients without imposing punitive costs and fees as a result.

Compensation

In August, the FCA said it planned to revist the methodology for compensating customers who have received inappropriate advice.

A statement read: “The current redress methodology used in the industry and by the Financial Ombudsman Service was originally developed for the Pensions Review of the 1990s.

“It is intended to put consumers back in the position they would have been in had they stayed in the DB scheme.

“The FCA is concerned that the redress methodology may no longer achieve this objective so has decided to consult on whether to update it. Any changes to the redress methodology will apply to future redress payments.”

The outcome of this will not be known until spring 2017.

Steven Cameron, pensions director for Aegon, comments: “Ahead of this, we believe the FCA should re-examine what constitutes ‘suitable advice’, including allowing for the value people may place on the flexibility and better death benefits the freedoms offer.

“At the same time, consideration should be given to how to reflect the funding/underfunding/employer covenant risk of specific schemes as part of the advice process.

Moreover, as Peter Bradshaw, national account director for Selectapension, says: “There is still a lack of guidance on handling insistent clients, and this remains a concern.”

On the issue of insistent clients, Andrew Pennie, head of pathways for Intelligent Pensions, comments: “The only additional guidance advisers have received is around the definition of safeguarded benefits and where firms need to have the necessary permissions and PTS to advise on transfers.

“Beyond that, there hasn’t been much additional guidance and clearly, delivering best advice and evidencing suitability for recommendations remains of paramount importance.

“One area that has been a talking point is that of ‘insistent clients’ and how advisers should deal with them. We don’t have any insistent clients – where we recommend not to transfer and the client still wants to, our view is that either we haven’t understood their objectives or they haven’t understood our advice.

“As such, we enter into a dialogue to resolve the different views which could lead to us changing our recommendation or the client fully understanding why a transfer is not in their best interests.”