Several financial advisers, alongside the regulator’s former technical specialist Rory Percival, have criticised the Financial Conduct Authority's (FCA) new transfer value comparator, claiming it is "misleading" and "unfair".
Under the new pension transfer rules, which have come into force on 1 October, financial advisers will have to provide their clients with a value of how much the benefits in their defined benefit (DB) scheme would cost today in the open market, which is the Transfer Value Comparator (TVC).
The TVC shows, 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).
Financial advisers are particularly concerned about the discount rate used in the calculation.
Andrew Boyt, pension transfer specialist and freelance consultant, told FTAdviser the issue was "the fact that it uses a very low, some would say unrealistically low, net investment return to illustrate the size of funds required to buy the accumulated pension ‘on the open market’".
A case being discussed by advisers on Twitter involved a TVC of more than £1.1m and a cash equivalent transfer value of £600,000. The discount rate used was 0.84 per cent per annum, based on the gilt yield, less 0.75 per cent per annum in charges.
"What use is this figure to anyone?," posted David Penney, director and chartered financial planner at Penney, Ruddy & Winter.
Former FCA specialist Mr Percival commented: "I fear the FCA has made a mistake with TVC calculation."
He added: "The basis is unrepresentative and hence unfair", saying there was a risk "advisers may dismiss the figures with clients and hence diminish the impact [of it]."
Matthew Bird, chartered independent financial planner at Gwent-based Seer Green Financial Planning, agreed the TVC was misleading.
He noted: "Any suitable candidate for transfer is likely to have a high attitude to risk and will be expecting way more than the risk-free rate per annum, and is unlikely to be buying an annuity given current rates, so what is the point extrapolating those figures?"
The FCA declined to comment on this matter.
Alistair Cunningham, chartered financial planner at Wingate Financial Planning, told FTAdviser he understood the criticism but disagreed with it.
He said: "If I'm investing some money for 15 years, I might get 5, 6, 7 per cent return. And I might be happy, if the client’s objectives support it, with transferring out with a critical yield of 6 per cent.
"But the point is that it is not guaranteed, they might not get 6 per cent, and the cost of buying an annuity could be more and they might never get the benefits they promise.
"Whereas using the risk-free rate of return, if there was a market for this, in theory that person could take that transfer and go to an insurance company, and buy that level of income guaranteed to be paid at their retirement age."
He added: "The reason why there is such a big difference is because it would be massively expensive to buy an annuity today for an income to be paid in 15 years."
Mr Cunningham said the TVC was "comparing apples with apples". He added: "And if someone says I don't want an apple, I want a pear, then fine, you can use other analysis, but this is the core of the TVC analysis."
He added there was a risk clients and their advisers would skim over it in the advice process. He said some advisers may also be irritated by the notion the TVC "will possibly reduce the number of people transferring by a very significant factor."
maria.espadinha@ft.com
