Defined Benefit  

Under which circumstances is a pension transfer warranted?

  • To get up to speed with the FCA's policy statement on DB transfers
  • To learn some of the key points now required on DB transfers
  • To learn about APTAs and TVCs

This, like many other changes, is being formalised rather than being new. 

Appropriate Pension Transfer Analysis (APTA)

In the consultation the FCA asked for feedback on its proposals for the APTA and have now set out a framework that is designed to help demonstrate the suitability of a personal recommendation.

It is not just all about the numbers; it is very personal to the client and can include behavioural and non-financial analysis. It should also look to see if there are other ways to meet the client’s objectives, as we know that the transfer is not likely to be the best way in the FCA’s opinion. 

The regulator does not intend to provide detailed rules and guidance on what should be included for each individual because advisers are best placed to decide this. They consider it is for the advisers to decide if a critical yield approach is valid in some circumstances.

The FCA has warned about the use of critical yields where the term to retirement is uncertain or if it is felt that the client may not understand what it means. 

Critical yields have been a benchmark for good or bad value transfers for years and although they have become less relevant over recent years it may be hard for some to turn away from them. I feel that the majority of clients struggle to understand what they mean, which basically makes them meaningless in the report.

I found it interesting that given one of the biggest changes that came about in the pension freedoms were the changes to the death benefit options in defined contribution (DC) schemes, no changes have been made to the handbook to reflect this. I understand that the FCA believes it is difficult to compare the different types of death benefit available, but surely that is the point. 

Some changes that have been made to the handbook include the following:

  • A new rule requiring advisers to consider the impact of tax and access to state benefits, particularly where there would be a financial impact from crossing a tax threshold/band.
  • A new rule to clarify that 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.
  • A revised rule requiring advisers to consider trade-offs more broadly.
  • New guidance on considering the safety nets – the Pension Protection Fund (PPF) and Financial Services Compensation Scheme (FSCS) in the UK – that cover both the current and receiving schemes in a balanced and objective way.
  • New guidance that if information is provided on scheme funding or employer covenants, it should be balanced and objective.

The last couple of these changes are interesting and they tie in together, but again are hard to deal with accurately. In most cases an adviser is not going to be able to get an accurate feel of the strength of the company and therefore the pension scheme. I cannot say I am surprised that this has been included though, given recent high profile cases. 

Transfer Value Comparator (TVC)

The FCA intends to proceed with the mandatory TVC. The purpose of which is to provide consumers with some context for the level of their cash equivalent transfer value (CETV) and to help them make an informed decision.