Advisers warned they could be breaking DB transfer rule

Advisers warned they could be breaking DB transfer rule

Financial advisers could be breaking new pension transfer rules if they fail to ask for the right fund data, a technology provider and former adviser has warned.

Graham Miller, managing director at software provider O&M Systems, told FTAdviser advisers had to contact providers and ask for the specific rates of return of the funds used as part of their pension transfer advice.

This is due to the fact the new rules dictate that the onus was on the adviser to use the "appropriate rates, regardless of what a provider’s quote system limitations might be".

If advisers didn't use rates of return that reflected the investment potential of the assets, "the file would presumably fail", Mr Miller warned.

The first rule of the appropriate pension transfer analysis, or Apta – which was introduced in October and replaced the transfer value analysis – is that a firm must use rates of return which reflect the investment potential of the assets in which the retail client’s funds would be invested.

This means that advisers "need to have already decided where the funds will be invested in the event of a transfer being recommended", Mr Miller noted.

He added: "Everyone will have their chosen strategy for drawdown investment and the inclusion of this rule is a reminder from the [Financial Conduct Authority] that the growth rates could differ from case to case."

Mr Miller explained that the industry standard growth rates was currently 2, 5 and 8 per cent for pensions, with the mid-rate of 5 per cent being generally used.

But there is a "considerable degree of inconsistency" between product providers, he warned.

While traditional product providers tend to quote specific rates for funds investing in their products, wraps, platforms and self-invested personal pension operators are more likely to use 5 per cent and only quote using lower rates when asked to do so, he added.

Besides being fund specific when requesting growth projections from providers, advisers should also check the growth rate is reasonable for the investments concerned, he noted.

Advisers should also be prepared to ask the provider for an alternative projection at a lower rate, and apply the same rate when producing your cash flow projections for Apta purposes, he added.

Alistair Cunningham, financial planning director at Wingate Financial Planning, agreed that "firms should definitely use a realistic rate of growth".

He said: "Otherwise, the Apta is worthless – clearly the biggest risk is advisers 'gaming' the system by using unrealistically high rates."