In its consultation, Advising on Pension Transfers, the UK watchdog has been seeking views from industry on how to update its existing guidance to provide advisers with a framework to help them give the right advice so consumers can make better informed decisions.
“We recognise that the economic and legislative environment has changed significantly, so we want to ensure that financial advice considers the customer’s circumstances in full and properly considers the various options available to them,” the document said.
Pension transfer clampdown
In January, the regulator issued a warning to pension transfer firms after reports that some clients were being scammed and their funds transferred into unsuitable investments.
Since the start of the year, the FCA has taken steps against a number of firms to stop them for carrying out both domestic and international transfers.
Proposed changes
In its consultation, which closed on 21 September, the FCA proposed:
- introducing a rule to require all advice on the conversion or transfer of safeguarded benefits to result in a personal recommendation;
- updating and adding to Handbook guidance on assessing suitability when giving a personal recommendation to convert or transfer safeguarded benefits;
- introducing Handbook guidance on the role of a pension transfer specialist, and amending the definition of a pension transfer specialist;
- replacing the current transfer value analysis (TVA) with a requirement to undertake appropriate analysis of the client’s options including a prescribed comparator indicating the value of the benefits being given up; and,
- restricting the application of the additional requirements in respect of pension optouts to those cases where there are potential safeguarded benefits.
The new rules will be published in a policy statement by early 2018.
TVA no more
The FCA conceded that the current TVA is no longer leading to the best outcomes for consumers and that advisers are often focusing too much on this analysis when advising on pension transfers.
The regulator, therefore, has proposed replacing the TVA with “an overarching requirement to undertake appropriate analysis of the client’s options”.
The new requirement will be referred to as the appropriate pension transfer analysis or APTA.
Industry support, but
On the whole, the response from industry appears to have been positive and welcomed the review and proposed changes.
Alastair Black, head of financial planning propositions at Standard Life, said: “We think the consultation comes at the right time for advisers and their clients […] We are seeing demand across the industry soar, but guidance has remained unchanged, so the time is absolutely right to review.”
However, Prudential, Old Mutual and the Pensions and Lifetime Savings Association (PLSA) all identified pension transfer analyses and comparators as key concerns.
Difficult to understand
Vincent Smith-Hughes, retirement expert at Prudential, said: “One of the issues with the current approach is that the critical yields used in Transfer Value Analysis (TVA) reports can be difficult for consumers to understand and therefore a fresh approach should be considered.
“The FCA’s proposal to introduce a prescribed Transfer Value Comparator (TVC), which would provide a graphical illustration of the costs of giving up benefits, is a good one. However, it is important that the information is reported simply and highlights the cost of the benefits being given up.”
The TVC will for part of the APTA.
He suggested providing a projection using low, medium and high growth rates to give a range of possible outcomes.
Use with caution
James Walsh, policy lead: engagement, EU and regulation at the PLSA, said: “It is vital that members consider their DB rights in the context of their overall circumstances…
“However, there is a risk that the proposed new TVC, which would focus the member’s attention on a single set of figures, could inadvertently lead to people taking decisions which are, in fact, quite narrowly based.”
He added that, “combined with the high transfer values generated by current low interest rates. This could lead to more people transferring”.
“The TVC should be used with caution.”
Confusing to explain
A spokesperson for Old Mutual Wealth told International Adviser: “We strongly believe that an inflation adjustment with the TVA should not be incorporated. The discount for inflation in projections is based on 2.5% per annum, which is currently the same as the future assumption for RPI in the [TVA] report.
“However, CPI is currently 0.5% lower at 2%, with consideration being given to widen the differential to 1%. This could mean that benefits under a final salary scheme which provides CPI increases, when discounted back to the date of leaving pensionable service, could be lower than the actual value of the benefits at that date.
“This would be very confusing for an adviser to explain to a client.”
