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15 August 2017

On 21 June 2017 the FCA published CP17/16: “Advising on Pension Transfers“. The paper is open for online responses by 21 September 2017. Mark Devlin, Technical Manager (Pensions) at Prudential discusses the main headline-grabbing matters.

Access the full document here.

Scrapping the starting position that DB transfers are unsuitable

While this may initially appear to be a softening of the FCA’s view, in actuality it’s not, and they confirm this in section 2.3.

They will be replacing the current wording in the FCA handbook to state that retaining safeguarded benefits is likely to be in the client’s best interests.

Reading between the lines, the starting position is still that a transfer is unlikely to be in a client’s best interests.

But, should this make a difference to advice in this area? Arguably not. Ultimately, the starting position of the regulator (or a compliance/assurance department) is irrelevant. It’s the end result that counts, and if the file (and supporting evidence) is suitable then there is no issue. If the file isn’t suitable, then the regulator’s starting position persists.

However, within the document they have elaborated on what is required to formulate suitable advice. This is listed below and it is proposed this is added to the handbook. While this is nothing new, it is helpful that there will be defined guidance on this.

What is required to formulate suitable advice

  • the client’s income needs and expectations and how these can be achieved, the role safeguarded benefits play in providing this income and the impact and risk if a conversion or transfer is made
  • the specific receiving scheme being recommended following the transfer and the investments being recommended within that scheme to ensure that it is appropriate for the risk profile of the client
  • the way in which the funds will be accessed, either immediately or in the future, including follow-on arrangements
  • alternative ways of achieving the client’s objectives. For example, there may be ways for a client to provide death benefits which can be funded from income rather than by a lump sum funded by a pension transfer, and which does not carry so much risk
  • the relevant wider circumstances of the individual

The FCA isn’t proposing to list examples of ‘relevant wider circumstances’, as this will be dependent on the individual. However, they will include tax issues, death benefits, interaction with means tested benefits, state of health, family situation and other sources of retirement income as being relevant.

Requirement for a personal recommendation

Following on from the Financial Advice Market Review (FAMR), a proposed change in the recent Treasury consultation aims to give firms more confidence to help consumers, without actually providing a personal recommendation.

However, this proposal specifically relates to clients with relatively simple needs. In the FCA’s view (and I’m sure they are not alone in this) giving advice on the conversion and transfer of safeguarded benefits cannot be defined as “relatively simple”. Furthermore, it is defined as a separate specified activity in legislation.

The FCA has seen advisers claim they have not given a personal recommendation. But the advice did not comply with the existing analysis requirements and in many cases was actually a personal recommendation.

As such they are asking for agreement (that this area of advice) should always require a personal recommendation.

Scrapping TVAS?

Again this appears to be a change of direction, but TVAS will simply be replaced with an ‘appropriate pension transfer analysis’ or APTA. The methodology is still going to be based on annuitisation (which is not required in a post freedoms world). So is this more an adaptation than an update?
This also featured in a thematic review around enhanced transfer values, where there was a failure to personalise the TVAS to replicate the scheme benefits.

Another issue that firms face is that PI insurers base the premium on the maximum Critical Yield (CY) a firm will advise on. But surely the CY is just a part of the suitability? The FCA would seem to agree.
Add to this the concept of the CY and the calculations involved make it extremely difficult for clients to grasp. How can they possibility determine therefore if they wish to proceed?

The advice framework will still revolve around annuity purchase. The focus if APTA gets the go ahead is on the cost in today’s terms of buying an equivalent annuity in future, as opposed to a required yield.

Advisers will have discretion as to how they show most of the APTA, but there are minimum rules that have to be followed. These include assessing income needs and other outgoings in retirement, and how the ceding scheme could meet these.

They recognise that the client’s objectives may not necessarily match what they need; there is more on this later. The advice should take this into account, and if there are trade-offs to be made then the impact of this should be detailed.

There is also a proposal for a mandatory chart format to compare the CETV to an annuity purchase. This will be more specific to the client’s actual circumstances than a TVAS. Basically, this is designed to show how the CETV compares to an immediate annuity. This will be called the transfer value comparator (TVC). For those at the ceding scheme’s normal retirement age, this is a relatively simple thing. For those more than 12 months away, the present value needed to fund that annuity today is required.

They are proposing that the APTA is illustrated on the likely expected returns of the assets in which the retail client’s funds will be invested. This could lead to complications. Let’s assume a medium risk client sees two different advisers; one believes the expected rate of return will be 5%, the other believes that they will achieve 6% – this could have a big bearing on the decision that is made.
Advisers will have discretion over whether to incorporate the remainder of the APTA into the suitability report or, to present the entire analysis alongside it. But the FCA is proposing that the TVC must be presented to the client in a prescribed format, as illustrated below:

Example of transfer value comparison

The transfer value offered instead of your pension income is: £120,000
How does this compare with the amount you need to buy the same income on the open market?

It could cost you £140,000 to obtain a comparable level of guaranteed income on the open market.
This means the same retirement income could cost you £20,000 more by transferring.

The requirement to undertake an APTA( including a TVC), will apply to all pension transfers and conversions of safeguarded benefits, except where the only safeguarded benefit is a GAR. Where a partial transfer has been offered, the APTA and TVC should take account of the actual structure of the benefits to be transferred.

The FCA are also seeking views how cashflow/stochastic modelling could be incorporated into the advice process. This seems to be a repetition of PS16/12, and is a feature of a lot of advisers propositions now.

The TVC will only show the annuity comparison, how do you then show clients what a drawdown journey would look like? Would it be preferable to demonstrate both by combining a guarantee comparison with cashflow/stochastic modelling?

PTS implications

The FCA wants to ensure that not only are PTS advisers suitably qualified, they also have relevant experience. A simplistic analogy I like to use is that you can learn how to pass your driving test, but it takes experience to really learn how to drive.

The FCA are also concerned that there are PTS advisers that are not additionally investment advisers. So, a PTS can check the advice given by a non-PTS, but if they are not also investment advisers, how can they assess if the overall transfer is suitable?. There is also the issue of firms that look solely at the transfer in isolation without knowing the customer’s full circumstances., A given example of this is focusing in on an enhanced transfer value which on its own may seem attractive. They’re also concerned that external providers of PTS for non-PTS authorised firms merely look at the TVAS to advise if a transfer is suitable.

The key question is: “Is the enhanced transfer value a good idea for this specific client?”

So how can a PTS recognise a good outcome if they are unaware of the full customer circumstances including details of the receiving scheme and investment? As we know there have been plenty of stories in the press of PTS firms advising on a transfer, where the transferred funds have then gone into “exotic” investments that were unsuitable for the client, making the overall recommendation to transfer unsuitable. The press stories would suggest that FOS certainly doesn’t think this is a good outcome.

Looking at the ultimate investment destination will also apply to UK based PTSs that are working in conjunction with an offshore adviser for a QROPS transfer.

Guidance on insistent clients

The current FCA handbook offers no guidance on how insistent clients should be dealt with. However they did issue a factsheet in 2015 that still applies. Basically, where a client wants to modify or go against the advice, it is up to the firm to decide if the transaction should still occur.
There will be a further consultation on insistent client guidance.

Opt outs

The FCA is proposing that PTS involvement is unnecessary for an opt-out from an employer’s scheme that has no potential for accruing safeguarded benefits. The loss of the employer contribution is a straightforward concept to consider. There will still be a high bar to overcome in establishing basic suitability if an opt-out is considered.

However, the current TVAS rules do not apply to pension opt-outs. The FCA aren’t proposing to extend the proposals in this consultation paper to include them. But they do state that in order to comply with existing rules on suitability, an adviser is likely to need to undertake analysis of the potential benefits available in these cases.

In summary

A lot of what has been commented on and proposed in the paper isn’t a surprise for those giving advice in this area. It does appear to be a move in the right direction, but has it gone far enough? As we know the pension transfer review of advice given on pension transfers 20-30 years ago created a lot of stigma. Clearer guidance and more structure to providing advice in this area can only be a good thing.

As with all proposals, some will agree and some will disagree. But the important thing here, is that if you or your firm will be affected by this proposal, read the paper thoroughly and respond to the FCAs questions.

To use the wedding analogy, speak now (or at least by 21 September 2017) or forever hold your peace.

For more technical help by Prudential’s experts visit the PruAdviser website where you can find generic articles and analysis of legislation and consultations.

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