Advisers should be required to include cashflow modelling in all advice on defined benefit pension transfers, Prudential's head of technical Les Cameron has said.
Mr Cameron claimed the move would bring rules governing defined benefit transfer advice in line with the post-pension freedoms world, in which fewer and fewer people are purchasing an annuity.
Currently, the Financial Conduct Authority requires anyone looking to transfer out of a defined benefit (DB) scheme to complete a transfer value analysis (TVAS) report to find out the "critical yield".
Critical yield determines the income a lump sum would need to generate in order to equal the benefits received if the member remains inside the DB scheme.
Mr Cameron said mandatory TVAS reports should be scrapped, arguing the focus on critical yield was a hangover from the days when it was compulsory to purchase an annuity.
He said retirees were now free to vary their income through retirement, and that DB transfer rules should reflect that freedom.
"When you get a cashflow model, you can model all the customer’s actual circumstances – their needs, their objectives," he said.
"If somebody says I’m going to have expenses of £30,000 a year for the first four or five years of retirement, and then it will drop to about to about £20,000, and then maybe 10 years later it’ll go up to £30,000 again, there is an actual model of what that would look like."
He argued that while TVAS reports might still be useful, they should be discretionary rather than compulsory.
“The understanding of the risk being taken on [when transferring out of a DB scheme] can be met by cashflow modelling," he said.
Since pension freedoms were introduced in 2015, the number of people transferring out of DB schemes has rocketed.
Mr Cameron said demand for Prudential's TVAS report service had increased eightfold since the changes came in.
He added record transfer values - resulting from low bond yields - were encouraging even more people to consider transferring out.
He said he had recently seen a transfer value that was more than 50 times the annual pension.
Philip D. Stevenson, a chartered financial planner at Ark Financial Planning, said he did not agree that TVAS reports should be made discretionary.
"The whole point about the critical yield figure is it gives an idea of what level of risk you are taking on if you transfer out. That's a pretty critical piece of information," he said.
He agreed that pension freedoms had changed things, and said cashflow modelling was an important follow-on from a TVAS report.
He also agreed that the FCA's DB transfer rules were "miles behind the ball", having so far failed to adapt to pension freedoms and high transfer values.
Nevertheless, he said none of that justified scrapping mandatory TVAS reports.
The FCA declined to comment on whether it would consider replacing mandatory TVAS reports with mandatory cashflow modelling.
james.fernyhough@ft.com
