According to the Policy Statement: “The purpose of the TVC is to provide consumers with some context for the level of their transfer value to help them make an informed decision. That context is the cost of providing the same benefits of the DB scheme but in a DC scheme.”
The assumptions that the FCA has mandated for the TVC are ultra-conservative, like gilts minus 0.75 per cent for roll up, and all clients buying an annuity with a 4 per cent advice charge on retirement.
This will make it very clear to anyone seeking a safe, stable, gently-rising income of the sort that DB schemes provide, that by far and away the best way to get this is to stay in your DB scheme.
And indeed, the FCA has reiterated its previous stance that “for most people keeping safeguarded (DB) benefits is likely to be in their best interests”.
With the Pension Protection Fund (PPF) now well-entrenched in the pensions landscape, I think we have seen the end of transfers driven simply by a lack of trust in the sponsoring employer. Emotions may still run high, as big transfer exercises are often part of wider corporate upheaval including redundancies, site closures and sales of historic elements of a business. However, advisers who handle transfers for emotional reasons do so at their own peril. Recent experience shows they may be quickly put out of business by the regulator.
Interestingly, the TVC itself does not need to be personalised: “no allowance for individual circumstances, marital status or a desire to take tax-free cash,” needs to be made. However, it is clear that the APTA fills that gap. Indeed, the two documents combined need to be designed to ensure that a much more comprehensive, personalised suitability reporting is carried out for those considering transferring out of their DB pensions.
The FCA pours a great deal of cold water on use of critical yield calculations which are at the heart of the outgoing TVA-based transfers regime. Critical yield is the estimated investment return, after charges, that must be achieved in order to receive retirement benefits at least as good as those offered by a DB scheme. The FCA also states that where cash flow modelling is used, any limitations in the software are not an excuse to limit advisers’ responsibility for providing suitable advice.
Essentially, what the FCA emphasises throughout is that advisers should not place too much reliance on any specific software tool but instead focus on providing a personal recommendation based on a very thorough analysis of the would-be transferee’s personal circumstances and retirement income needs. They demand a clear-eyed focus on “a client’s financial situation and investment objectives, as well as their knowledge and experience in the relevant investment field.”