Here are the five key things you need to know about the changes the FCA plans to make to how you should advise on pension transfers.
1) Most people better off staying put
After the widespread mis-selling of pension transfers in the late 1980s and early 1990s, which led to the pension review, regulators introduced guidance that all advice on pension transfers should start from the assumption that a transfer is unsuitable.
Despite pension freedoms the regulator’s new rules are set to state “most consumers will be best advised to keep” their defined benefit pensions.
Since the introduction of the pension freedoms in April 2015, consumers have more options available to access their pension savings.
Previously, pension savings could only be used to provide an income in retirement (through an annuity or drawdown).
Pension savings can now be accessed as income or cash. DB pensions must be transferred to a defined contribution (DC) scheme to access the savings other than through the scheme pension.
This has combined with more recent changes to the financial environment leading to historically high levels of transfer values.
2) Conversion and transfer of safeguarded benefits
The FCA intends to add a requirement that advice on conversion or transfer of safeguarded pension benefits must now include “a personal recommendation”.
The regulator stated if advice does not include a personal recommendation “it won’t provide appropriate protection for consumers.”
The watchdog stated: “In view of the complexities when considering a conversion or transfer of safeguarded benefits we think that, for advice to be meaningful, it is important it looks at the consumer’s individual circumstances and provides a specific recommendation.
“The merits of transferring or converting safeguarded benefits are highly dependent on an individual’s personal circumstances.
“To make informed decisions, consumers need to understand the specific details of their safeguarded benefits, make an assessment of the value of this benefit for their specific circumstances and compare this to the value of alternative options.”
3) How advisers must assess suitability
The FCA proposes to remove the existing guidance that an adviser should start from the assumption that a transfer will be unsuitable.
This will be replaced with a statement in the Handbook that, for most people, retaining safeguarded benefits will likely be in their best interests and there will be guidance that advisers should have regard to this.
This will not require an assumption to be made by an adviser, according to the watchdog.
The regulator stated an assessment of suitability should focus on whether a transaction is right for the individual and should be assessed on a case by case basis from a neutral starting position.
According to the FCA the adviser needs to demonstrate that the transfer is in the best interests of the client.
Additional guidance will also be produced by the FCA to make clear that in order to provide a suitable personal recommendation an adviser should consider the following elements:
* the client’s income needs and expectations and how these can be achieved, the role safeguarded benefits play in providing this income and the impact and risk if a conversion or transfer is made.
* the specific receiving scheme being recommended following the transfer and the investments being recommended within that scheme to ensure that it is appropriate for the risk profile of the client.
* the way in which the funds will be accessed, either immediately or in the future, including follow-on arrangements.
* alternative ways of achieving the client’s objectives. For example, there may be ways for a client to provide death benefits which can be funded from income rather than by a lump sum funded by a pension transfer, and which does not carry so much risk.
* the relevant wider circumstances of the individual.
4) Pension transfer specialists redefined
Advice on pension transfers, pension conversions and pension opt-outs must still be given or checked by a pension transfer specialist, who must be a fit and proper person with specific qualifications.
However the existing requirements do not specify what is intended when a pension transfer specialist checks, rather than gives, advice on the transfer or conversion of safeguarded benefits.
The FCA revealed it has seen cases where a pension transfer specialist simply runs the transfer value analysis (TVA) calculation or checks the numbers that have been produced rather than looking at the overall assessment and recommendation made as a whole.
According to the watchdog this is not in line with their expectations so it will add guidance to make clear that checking the advice means assessing the reasonableness of the personal recommendation reached by the adviser.
Checking does not require a fundamental repeat of the advice process, but will involve an independent assessment of the soundness of the basis for the advice.
It should take into account the client’s wider circumstances, including their appetite and capacity for risk and the nature of the scheme being transferred to.
In cases where the pension transfer specialist considers that the outcome reached by the adviser is unreasonable, or does not consider that all the relevant factors have been included, the FCA expects the pension transfer specialist to clearly document the reasons for their view.
The FCA also expects the adviser to take this into account in their recommendation to the client and the communications that accompany this advice.
The regulator will amend the glossary definition of a pension transfer specialist to support this.
It currently defines a pension transfer specialist as someone who checks the suitability of the transfer.
The definition will now refer to checking the reasonableness of the outcome of the advice.
5) Goodbye transfer value analysis
Current rules require advisers to make a comparison, commonly known as a transfer value analysis (TVA), between the benefits being given up and the benefits available under the receiving scheme.
The analysis calculates the rate of return – often referred to as the critical yield – that is necessary to reproduce the safeguarded benefits being given up, assuming the purchase of an annuity is based on the same benefits.
The output from this analysis should be taken into account in the overall assessment of suitability.
The regulator now proposes replacing TVA with an overarching requirement to undertake appropriate analysis of the client’s options - an ‘appropriate pension transfer analysis’ or APTA.
Part of this process will be the inclusion of a prescribed comparator providing a financial indication of the value of benefits being given up.
The regulator stated this new analysis should include:
* an assessment of the client’s outgoings and therefore potential income needs throughout retirement.
* the role of the ceding and receiving scheme in meeting those income needs, in addition to any other means available to the client – effectively obtaining an understanding of the client’s potential cashflows.
* consideration of death benefits on a fair basis, for example where the death benefit in the receiving scheme will take the form of a lump sum, then the death benefits in the ceding scheme should also be assessed on a capitalised basis, and both should take account of expected differences over time.
The regulator stated advisers must consider each client’s risk appetite and ability to manage investments when assessing the possible benefits from a potentially suitable receiving scheme.
This includes where the plan is to withdraw funds and move them outside the pension environment, whether into another retail investment product or wrapper or as cash.
The regulator also considers that taxation consequences should be an inherent part of the consideration of crystallising benefits and accessing funds.
emma.hughes@ft.com
