This is a real game changer. Transfers are no longer going to be about whether the sum offered by the ceding scheme is good value. They are going to be about whether the shape of DC benefits fit the individual client’s needs better than the DB equivalents.
I believe the answer will often be ‘yes’ and can be demonstrated by a cash flow analysis tool. DB benefits are very back-end loaded. They usually increase, often at rates ahead of today’s low level of inflation. And yet a study by consultancy FinalytiQ proves that pensioner expenditure falls during retirement by around 1 per cent a year in real terms.
Meanwhile, a DC pension can be front-end loaded, taking some cash at outset to pay off any remaining mortgages or loans, to replace a company car or to add a conservatory for those ‘pipe and slipper’ mornings. And then provide a higher pension in the early years of retirement when one is still fit enough for jaunts like taking the grandchildren on holiday.
The APTA is a robust way of demonstrating that a benefit reconstruction is being done to meet agreed client needs. Adviser firms will be responsible for ensuring the APTA is undertaken thoroughly and supports the personal recommendation.
Advice firms are held liable for the advice, even where it is checked by a third-party pension transfer specialist. Consequently, advisory firms must make sure that any software used in their transfer analysis is supporting their recommendation, not driving it.
The APTA has to look forward. The FCA has woken up to the fact that taking a transfer value is not a point in time decision. It is a commitment to a new way of life, underpinned by an investment and income withdrawal strategy, both of which will require monitoring over time. The APTA must bring both of these into play.
Communication aspects are clearly going to be tricky. The TVC will be conveying a clear ‘don’t do it message’. But it is housed within an over-arching APTA that may say: "We’ve identified your personal needs and found that transferring to DC is the best way of meeting them." Whatever you do, do not take the short-cut favoured by lazy advisers of saying: "This bit is only included to keep the regulator happy".
Successful advisers will be able to show clients how moving to the much more flexible structure of DC enables the large quantum of wealth tied up in their pension to be deployed in a better manner than the DB scheme was going to. Two further changes will make life more expensive for advisers.