Probably the most significant trend over the last year has been the dramatic increase in final salary transfers. So, it is no surprise that the FCA has published proposals to make a variety of changes to the advice process. These form part of a consultation running until 21 September, in which the FCA also ask for views on a variety of other related issues, where they may consider future changes.
Transfers have risen sharply since pension freedom as many people are attracted by the high transfer values currently being offered, as well as the flexibility, control and superior death benefits available following a transfer. However, some may overlook, or not fully understand, the longevity and investment risks they take on after transfer.
The consultation paper proposes changing guidance that advisers should start with the assumption that transferring is unsuitable. Instead, advisers should start from a neutral position and assess suitability on a case-by-case basis.
The current Transfer Value Analysis (TVAS) requirement would also be replaced, as it is not fit for purpose in the new world of pension freedom. A critical yield is of little or no use in some situations, especially in the many cases where benefits are being taken immediately after transfer. While many other people have no intention of ever buying an annuity, so a system which is based on that concept is flawed.
The intention is for TVAS to be replaced with a comparison showing the value of the benefits being given up. Much depends on the final rules, but using a cash value may make it more likely a customer will understand the value of the benefits which they are potentially giving up. And with many advisers already using cash-flow modelling tools it moves the regulatory requirements towards what advisers are doing in practice.
These changes aren’t likely to come into force until next year at some point so, for now, the current rules remain.
In addition to these proposals, the FCA asks for views in a number of areas but isn’t proposing any changes at this time. This includes the qualification and experience of pension transfer specialists. In particular, the FCA appears to be concerned that not all pension transfer specialists are investment advisers. Opinions are also sought on the position where the transfer advice is outsourced to another firm, and the relationships between providers and advisers where providers make software (such as TVAS) available for an adviser to use.
Despite the potential changes, the need for advice in this area is clear. Many people are looking for help, so I hope that advisers will continue to advise people considering final salary transfers. Despite the obvious attractions which pension freedom offers, many people are likely to be better staying put. However, there are situations where a transfer will be appropriate advice.
In those situations, it is key that the documentation is as robust as possible. For example, greater death benefits and more flexibility may often be key customer desires. Documenting alternatives – such as separate protection policies, or using other pensions or assets to provide flexibility – will demonstrate consideration of other options. Cash flow modelling, including stress testing that model, is likely to play a key part in helping customers understand what the future may hold if they transfer. And considering alternatives – such as hybrid drawdown contracts – which help customers mitigate risks after transfer can help demonstrate the customer was aware of the risks they are taking on.
Finally, there are a number of topical issues which the FCA didn’t include in their paper – such as contingent charging, and the need for schemes to provide information to customers and advisers in a standard format.
Final salary transfers are a complex and emotive topic. Which is precisely why people need the expert help advisers can bring to work out if a transfer is suitable or not. I’d urge as many of you as possible to respond to the consultation. Only by doing that can the regulator get an understanding of the challenges you are facing in this area.