Article from Retirement Planner on FCA consultation for DB Transfers:
The FCA’s consultation paper ‘Advising on Pension Transfers’ should help to provide a firm footing for all those involved in advising on DB transfers from this point, says Nigel Chambers.
The retirement industry has been waiting with increasing anxiety for Consultation paper CP17/16 ever since the publication of CP15/30 – and it should provide a firm footing for all those involved in advising on defined benefit (DB) transfers going forward.
While, in light of pension freedom, the Financial Conduct Authority (FCA) has removed the reference to the starting point being a transfer is not in the client’s best interests, it has not significantly softened its approach because it still requires the adviser demonstrate the transfer is in the “best interests of the client”.
For most people considering a transfer and wanting more flexibility in the way they draw their pension, any decision is essentially a balance between differing needs and objectives.
Some situations will be clear but, for those customers who put a greater value on money available at the early years of retirement than on protecting an income flow for their later years, it will be difficult for the adviser to say taking the transfer is in their “best interests”.
The main provisions on which the FCA is consulting break the requirements into two parts:
- A new pensions transfer value comparator (TVC) to replace the current critical yield; and
- A suitable personal recommendation, which needs specifically to review the client’s income needs and expectations, make specific allowance for the investments into which the transfer will be made, and the client’s future plans for accessing funds and the need for death benefits.
Together these make up an ‘appropriate pension transfer analysis’ (APTA).
The replacement of the critical yield with a single figure showing the transfer value that would be needed to provide the scheme benefits on a given set of assumptions, directly set against the actual transfer value being offered, will clearly be easier for the client to understand.
This TVC is still, however, to be based on the assumption an annuity will be purchased at the scheme’s normal retirement date and will not reflect the potentially better returns available for the longer-term investments implied by customers moving into flexible income arrangements.
The increased emphasis on a personal recommendation, considering all of a client’s circumstances, merely reflects common practice among the best advisers, whose suitability reports already take into account the full range of a client’s needs and objectives.
In this respect, the FCA makes an interesting differentiation between a client’s objectives for seeking a transfer – which may include immediate access to money – and the client’s needs, which potentially relate more to their long-term income requirements.
One of the themes underpinning the CP17/16 is that any analysis undertaken must take into account the specific product, charges and investments the adviser is recommending any transfer be made into.
This has the benefit that any figures, projections or cashflows relating to drawdown products must effectively use the same underlying assumptions as would be used in the key features illustrations (KFIs) that must be produced before such a product is purchased. This means advisers will generally need to use the “middle” projection basis used in the production of KFIs.
CP17/16 does nothing to reduce the complexity of the initial transfer value analysis process as all the current data will still be needed to produce the TVC. At CTC , we do however believe there is considerable scope for increased use of technology in the collection of the fact-find data and risk assessments that will be needed for the APTA in tailoring the customer’s requirements for income to suitable drawdown illustrations and cashflow modelling.
CTC will be providing services and technology to support the end to end advice process laid out in the FCA consultation.