Defined Benefit  

DB transfer activity expected to decline under new rules

DB transfer activity expected to decline under new rules

The introduction of a transfer value comparator (TVC) to defined benefit (DB) pension advice is expected to stop some savers from cashing in their pensions, a consultancy has said.

Under new rules from the Financial Conduct Authority (FCA), which will come into force in October, financial  advisers will have to provide their clients with a value of how much the benefits in their DB scheme would cost today in the open market, which is the TVC.

This illustration could deter savers from giving up their valuable guarantees, LCP said.

The TVC will show, in graphical form, the transfer value offered by the DB scheme and the estimated value needed to replace the client's DB income in a defined contribution environment, assuming the investment returns are consistent with the client's attitude to risk.

This will be included in the appropriate pension transfer analysis, or APTA, which will replace the current transfer value analysis (TVAS).

LCP is anticipating that schemes with less 'generous' transfer values could have lower take-up rates after the new rule is introduced.

Clive Harrison, partner at the consultancy firm, told FTAdviser that a transfer value is calculated according to the investment strategy of the DB scheme.

He said: "Schemes have different investments, some will invest in very low risk assets, and those will have transfer values a lot more generous; schemes which are invested in a lot of equities will be less generous.

"We can be talking of potentially double the value for the same level of benefits."

The transfer value comparator, however, won’t take into account the investment of the pension fund – it will be looking at the cost of buying an annuity on an individual basis, Mr Harrison said.

Mr Harrison said while financial advisers may not be expecting to change their recommendation due to the new comparator, if clients "suddenly see that big gap, it will put some of them off".

LCP illustrated the potential difference between readings in the TVC based on a typical 55-year-old, currently 10 years away from retirement with a DB pension of £10,000 per year, who would see a gap of £190,000 between the transfer value and the TVC replacement cost.

Mr Harrison also said the introduction of the TVC could delay the transfer decision to a time closer to the retirement date, "by the time that they actually want to withdraw their benefits.

"At that point, the gap between the two bars is likely to be lower," he said.

Alan Chan, director and chartered financial planner at London-based IFS Wealth & Pensions,argued that the "new TVC method will be better as it will make it easier for individuals to understand and compare the benefits".

He said: "Traditionally the output of a TVAS report would be a critical yield figure which is the annual growth rate required to match what the DB scheme is offering.

"This can be quite confusing and difficult to understand. Having a graphical illustration of the two pension 'pots' in the TVC will be more effective for consumers.