Paul Squirrell: Pension transfer advice firmly in the spotlight

Defined benefit transfers have come under unprecedented regulatory scrutiny this year in the wake of widespread suitability failings. Paul Squirrell assesses the FCA's tougher rules and their implications for advisers

Following last June’s consultation (CP17/16), the FCA finally issued its policy statement Advising on Pension Transfers (PS18/6) in March this year.

This much-anticipated report followed a review which found that only 47% of advice on DB to DC transfers could be shown to be suitable. What’s more, the regulator deemed that only 35% of products and funds recommended for new pension schemes were suitable.

As a result, many new rules relating to transfer advice came into effect on 1 April. I have detailed some of the key areas that advisers need to be aware of below.

Giving advice and assessing suitability

One notable change from the consultation is that the ‘starting assumption’ should be that a transfer will be unsuitable (the FCA decided not to change this to a neutral starting point). The regulator has said they will review this position after receiving feedback from a new consultation on the quality of transfer advice. The FCA also confirmed that all transfer advice must include a personal recommendation.

New guidance was also issued on assessing suitability for a personal recommendation. Advisers should consider the client’s intentions for accessing pension benefits as well as their attitude and understanding of both transfer and investment risk.

The client’s realistic retirement income needs should be considered – including how they can be achieved, the role played by safeguarded benefits and the consequent impact on these needs assuming the transfer, conversion or opt-out goes ahead (including any trade-off).

Advisers must examine alternative ways to achieve the client’s objectives other than to transfer, convert or opt out (this may include only giving up some safeguarded benefits).

Finally, if the information necessary to assess suitability is not available, such as income needs in retirement for a younger client, then a personal recommendation must not be made.

The regulator also addressed the role of a pension transfer specialist (PTS). They have stated a PTS should go beyond just verifying the numerical analysis. They should check the entire advice process and consider whether it’s sufficiently complete and confirm that the personal recommendation is suitable. They will need to inform the firm in writing that they agree with the advice, including any recommendation, before the report is given to the client.

This means that any disagreements between the PTS and the adviser must be settled before the client is given the suitability report.

Analysis to support advice

From 1 October 2018, transfer value analysis (TVA) will be replaced by appropriate pension transfer analysis (APTA). The FCA believe the pension environment has shifted significantly in recent years and this new minimum analysis requirement is designed to address this.

It also believes that, in the past, advisers often focused on the TVA element rather than making a rounded assessment of suitability based on all relevant factors.

Handbook guidance has been updated accordingly, which includes new rules such as a requirement to consider tax and access to state benefits, particularly where there would be a financial impact from crossing a tax threshold or entering a new tax band.

Cashflow modelling should consider a reasonable period beyond average life expectancy.

The FCA has advised that if a firm does not have the specialist knowledge in assessing scheme funding or employer covenants, they should consider not including any comment in their analysis.

A new comparator for evaluating transfers

As part of the new APTA, the current “critical yield” calculation will be replaced by a mandatory transfer value comparator (TVC).

This will be required in all cases, except where there is less than 12 months to normal retirement date or the safeguarded benefits are guaranteed annuity rates only.

The TVC should provide a graphical comparison of the CETV and the estimated cost of acquiring the same promised income from a DC scheme.

The estimated cost will be based on the sum required to purchase a pension annuity that would provide the equivalent scheme benefits at the client’s normal retirement date, discounted back to the calculation date.

The discount will be based on the fixed coupon yield on the UK FTSE Actuaries Indices for the appropriate term less ongoing costs of 0.75%.

The purpose of the TVC is to provide customers with some context for the level of their transfer value to help them make an informed decision. The regulator believes it would be inappropriate for the TVC to be the focus of the advice or a single rating factor in insurance premiums.

A new consultation

In addition to the policy statement, the FCA simultaneously launched another consultation on improving the quality of pension transfer advice (CP18/7), although the consultation period has now closed.

It sought views on many areas including qualification requirements for pension transfer specialists, how two advisers should effectively work together when outsourcing aspects of the pension transfer advice takes place and on triage services. Views were also sought on charging structures, including consideration of a ban on contingent charging for pension transfers.

A new policy statement is expected from the FCA in autumn 2018.

Advisers can keep up to date with the progress of this consultation – and all other regulatory issues and announcements – by visiting the FCA’s website.

Paul Squirrell is national pensions sales manager at FundsNetwork