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.”
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.
