1) Make it personal and make assumptions
Pension transfer advice must include a personal recommendation to the individual to either transfer or remain in the current scheme.
Despite protests from the industry, the regulator said it would not change the £30,000 advice threshold requirement because it is set out in legislation.
Last year the watchdog proposed ditching guidance an adviser should start from the assumption a transfer will be unsuitable, and move to a neutral starting point.
However, since the British Steel debacle the FCA has now decided not to proceed with this proposal.
Advisers must consider alternatives to a pension transfer to meet a client's objectives, which may include giving up only some safeguarded benefits so that a client can meet their income needs in retirement.
Advisers must also find out if a scheme offers partial transfers.
2) Transfers specialist can't just tick boxes
A pension transfer specialist must give or check advice on pension transfers.
Now the FCA has stated they must also assess the reasonableness of the personal recommendation reached by the adviser.
The specialist must also assess the compliance and reasonableness of the advice, and inform the adviser in writing of any disagreement with the process.
Any disagreements between the transfer specialist and the adviser must be settled before the client is given the suitability report.
Qualification requirements for pension transfer specialists were called into question and the FCA will consult on raising standards.
3) What appropriate transfer analysis looks like
An "appropriate pension transfer analysis (Apta)" should demonstrate the suitability of the personal recommendation, as well as both behavioural and non-financial analysis, and consider alternative ways of achieving client objectives.
Firms must decide whether to use a critical yield approach, but should be aware of the risks of using critical yield over uncertain future lifetimes where income would not be secure, or where consumers may not understand it.
The FCA warned of the limitations of cashflow modelling tools, which cannot limit advisers' responsibility for providing suitable advice.
For overseas transfers and self-invested clients, the FCA considers the Apta can be adapted to cover the personal circumstances of clients, and advisers must disclose any commissions payable on overseas investment.
As the relative value of the death benefits will change over time, the FCA retained the requirement to assess those changes at future points in time.
Advisers must consider the impact of tax and access to state benefits, particularly where there would be a financial hit from crossing a tax threshold/band.
Also the Apta must consider a reasonable period beyond average life expectancy, particularly where a longer period would better demonstrate the risk of the funds running out.
Advisers must consider trade-offs more broadly, as well as safety nets such as the Pension Protection Fund and Financial Services Compensation Scheme (FSCS) in the UK in a “balanced and objective way.”
When comparing a UK DB scheme with an overseas one advisers were told to look at the levels of returns and local inflation rates, relative to fluctuations in exchange rates, levels of charges on overseas arrangements, different tax considerations (including the possible charge on a Qualifying Recognised Overseas Pension Scheme), different legislative frameworks and local levels of protection (for example, the FSCS equivalent).
Where the advise doesn't know about a potential target market for a Qrops, the adviser should point out these limitations and consider whether they are able to provide advice.
4) Making valid comparisons
Existing transfer value analysis (TVA), which focus on the ‘critical yield’ needed to match a guaranteed income, will be replaced.
Instead the transfer value comparator (TVC) will show, in graphical form, the cash equivalent transfer value (CETV) offered by the DB scheme plus the estimated value needed to replace the client’s defined benefit income in a defined contribution pension, assuming investment returns consistent with a client’s attitude to investment risk and that they purchase an annuity.
A CETV is generally based on the full value of the expected pension income, but with no allowance for individual circumstances, such as marital status or a desire to take tax-free cash.
This means a consistent comparison can only be provided if the estimated value also ignores individual circumstances.
The FCA does not require the TVC should be personalised and instead the watchdog expects firms to take account of personal circumstances when preparing the Apta.
For a fairer comparison with the intended risk-free nature of the DB scheme, the FCA stated the investment growth rate in the TVC will be based on a risk-free return using gilt yields.
Firms should assume product charges during accumulation of 0.75 per cent and there is no explicit allowance for adviser charges during accumulation and this is referenced in the notes.
The 4 per cent annuity charge is intended to cover both the product and advice costs of buying an annuity.
For consistency, the annuity factors should allow for spouse/partner beneficiaries on the same basis as in the current scheme.
The FCA stated the TVC should be comparing it with a “comparable level of income from an insurer” and firms can use different colours in the bar charts as long as the general format remains unchanged.
The scale of the charts may be changed but the FCA stated the y-axis should always start at £0.
5) There is more to come
The FCA is also looking to raise qualification levels for pension transfer specialists (PTSs) to require them to obtain the same qualification as an investment adviser.
Further guidance may be needed to clarify the FCA’s expectations that advisers should be exploring clients’ attitudes to the general risks associated with a transfer, in addition to their attitude to investment risks.
How firms can carry out an appropriate ‘triage’ service (an initial conversation with potential customers), without stepping across the advice boundary, by providing generic, balanced information on the merits of pension transfers, will also feature.
A requirement for firms to provide a suitability report regardless of the outcome of advice is also being put forward by the watchdog and the FCA is seeking views on whether to intervene in relation to charging structures.
This could include introducing a ban on contingent charging, which is when a fee for advice is only paid when a transfer goes ahead.
emma.hughes@ft.com
