Just before Easter, the FCA delivered its package of publications on advice on defined benefit transfers. Chief amongst them was its response to its consultation last summer, shaped by its recent supervisory work. As well as the policy statement, FCA also issued a new consultation to cover areas raised from the previous work, as well as issues unearthed during its supervisory work.
So, what do you need to know about these documents?
- Advice is a personal recommendation. The FCA has changed the rules with immediate effect so that advice on defined benefit transfer is deemed a personal recommendation. This isn’t a big change for most advisers who were probably already working on this basis. Interestingly, it has also retained the starting point that a transfer isn’t in the best interests of a client – so if the recommendation is to transfer then the advice must effectively argue against this assumption.
- Role of the pensions transfer specialist (PTS). Advice on defined benefit transfers can be very different to advice in other areas, partly because for some people there are two advisers involved. The FCA has been examining this three-way marriage, and considering the role of the PTS. It expects the PTS to check the entirety of the advice process – not just the transfer value analysis (TVAS) – and confirm the personal recommendation is suitable. This means the PTS must have all the information about the client including the destination and investment plans for the transfer value. Otherwise, they can’t do their jobs. In its new consultation, the FCA is proposing handbook changes to make clear their expectations about how the PTS and the investment adviser should work together.The FCA also wants to make changes so a PTS has to hold a Level 4 qualification to advise on investments before they can advise on or check pension transfer advice. Many PTS already hold this, but those who don’t will need to acquire it before October 2020
- APTA and TVC. It’s official – the TVAS is on its way out. Instead, by October 2018 there will be two new analysis reports to replace it. The first – transfer value comparator (TVC) – is a mandatory requirement. Its purpose is to compare the transfer value offered with the cost of securing through an annuity the same benefits in a defined contribution (DC) scheme. The TVC cannot be personalised for the client – so even if the scheme offered a spouse’s pension but the client was single, the TVC still has to show the cost of buying a DC annuity assuming a spouse’s pension.The FCA has also been prescriptive about growth and charges assumptions. The DC growth rate has to be risk free (for example a gilt yield), and from this a 0.75% charge has to be deducted (regardless of actual charges). The cost of buying the annuity is assumed to be 4%, including advice charges.Because of these assumptions, the difference between the two figures in the TVC could be relatively small if the client is close to retirement, but quite big if the person is several years away, and therefore may be off-putting for some clients.The other analysis is the appropriate pension transfer analysis (APTA). This is personalised to the client’s needs and objectives and should demonstrate the suitability of the personal recommendation. The FCA has not given detailed rules and guidance on the relevant elements to include. The APTA can include behavioural and non-financial analysis as well as numeral analysis. It can include a critical yield if the firm wants or cashflow modelling. It should assess the relative value of death benefits and over different points in the future. And it should consider tax, access to state benefits, and trade-offs (eg between income and capital).
- Contingent charging. The FCA has responded to increasing interest by consulting on whether to remove contingent charging. It is grappling with how to remove contingent charging from the whole of the advice – from the transfer advice as well as the advice on destination and investment plans as well. And if it doesn’t do this, will advisers simply backload most of the overall cost of the advice onto the destination and investment advice charges.
- Other things being consulted on. The FCA is also consulting on a range of other areas – which have mostly come to light through its supervisory work. These range from how advisers should work with the PTS and take account of the proposed destination of a client’s transfer funds, to assessing a client’s attitude to transfer risk and to providing suitability reports even when the recommendation is not to transfer.
The number of people enquiring about DB transfers doesn’t appear to be abating, even though transfer values as a whole have stabilised. These new rules should give advisers working in this area more support and guidance on what the FCA expect. And hopefully, they should also give clients a clearer view of the decision they are making.