In its latest consultation paper in this area, which included the proposal of a ban on contingent charging, the watchdog proposed introducing a tweak to the tool used by advisers to determine how much a defined benefit pension would cost today in the open market.
The tool became a requirement under the pension transfer rules that came into force in October 2018 and shows, in graphical form, the transfer value offered by the DB scheme and the estimated value needed to replace the income in a defined contribution environment.
The FCA is proposing that the assumed product charge when the pension money gets converted to a retirement income product in the TVC should be reduced to 0.4 per cent from its current 0.75 per cent.
The regulator is proposing this change so that the TVC more closely reflects the charges associated with a product invested solely in gilts, it stated.
The TVC is included in the appropriate pension transfer analysis, or Apta, which replaced the transfer value analysis under the rules.
Alistair Cunningham, chartered financial planner at Wingate Financial Planning, explained the change will mean the TVC will be slightly lower and the assumed ‘cost’ of moving from a cash equivalent transfer value to a personal arrangement would fall.
He said: “For most people the change will be very slight, and will still result in the cost of their flexible pensions being a very big number.”
Ian Browne, pensions expert at Quilter, explained that at the time when the TVC rules were introduced, the 0.75 per cent assumption was considered suitable as the level of product charges someone would pay in accumulation, ignoring adviser charges.
He said: “In effect, this charge of 0.75 per cent paid for the pension tax wrapper and the underlying investment.
"It just so happens that 0.75 per cent is the charge cap that exists in the workplace pensions market for all scheme administration and investment charges (though this wasn’t specifically mentioned by the FCA in their policy statement).”
According to an example from Quilter - considering a transfer value of £787,000, a normal retirement date in 2030, and a gross gilt yield of 1.48 per cent - the difference between CETV and TVC would be £474,324 using the current 0.75 per cent rate.
This value would drop to £425,352 when using the proposed new factor of 0.4 per cent.
Mr Browne said: “For advisers, it is important to understand this difference in assumptions as they need to explain the TVC and part of this presentation is what generic assumptions have been used.
“The TVC takes into account some personal details of the client but for simplicity does also use these generic assumptions. This simplicity is the starting point of the Apta before you moving into the more complex detail.
“Capturing the client’s views on the simple TVC comparison is very important, as it could be that this is enough for someone to realise that the DB transfer is not appropriate.”
maria.espadinha@ft.com
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