The Financial Conduct Authority (FCA) has issued proposals that would overhaul how pension transfer advice is provided for consumers with safeguarded benefits. The proposals represent a significant shift from the current regime, which began following the introduction of the Transfer Value Analysis System (TVAS) in 1995.
Under the changes, transfer advice would be provided as a personal recommendation taking into consideration the client’s income needs and expectations; the specific receiving scheme being recommended; how the funds will be accessed; alternative ways of achieving the client’s objectives; and the wider circumstances of the individual. Where the adviser uses internal or external support, the responsibilities of the third party would also be more sharply defined.
Other proposals include replacing the current form of transfer value analysis (TVA) with appropriate pension transfer analysis (APTA). The APTA would include an assessment of the client’s outgoings; the role of the ceding and receiving scheme in meeting income needs; death benefits; and the prescribed comparator.
The prescribed comparator is likely to be the most controversial part of the proposals. The new scheme would follow the current TVAS approach, which values the transferring scheme’s projected benefits at the chosen retirement date on an annuity basis. However, the APTA would take a current interest rate rather than one that is averaged over 12 months. This means sharp index-linked gilt market movements would have an immediate effect.
When the annuitised value of benefits has been calculated, this would be discounted to the present day if the retirement date is more than 12 months or more away. The current TVAS calculates a discount rate using the Cash Equivalent Transfer Value (CETV) and this becomes the critical yield. Under APTA, the calculation would be reversed and the adviser would determine the discount rate based on the amount needed to reproduce the safeguarded benefits after appropriate charges.
The FCA also notes that APTA requirements would most likely necessitate more complex analysis on overseas transfers, but it does not make specific proposals. The consultation period will last for three months, with the FCA looking to unveil final rules in early 2018.
Paula Steele, managing partner at John Lamb Financial Planning, says: “The FCA’s proposals are mainly bringing the regulatory environment in line with the market. Advisers with a robust transfer process in place should have no cause for concern, but the transfer comparator initiative could present challenges.”