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FCA proposed changes to TVA rules in CP17/16

22 June 2017

As part of Consultation Paper CP17/16, the FCA is seeking comment on proposed changes to the rules around use of transfer value analysis (TVA) in DB Pension transfers, to ensure that the advice process results in “good outcomes”.

The changes arise from the Regulator’s supervisory work where, it said, it had concerns around the use of the TVA by adviser firms, where it had found too much reliance on the TVA “rather than making a rounded assessment of suitability based on all relevant factors”, as well as “critical yields which do not reflect the true risks of transferring”.

The Regulator also recognised that use of the TVA has “a number of limitations” which, following the introduction of the pension freedoms, “have become increasingly significant”, meaning the current TVA “is no longer leading to the best outcomes for consumers”.

The proposal in CP17/16 is to replace the current TVA requirement with one “to undertake appropriate analysis of the client’s options including a prescribed comparator indicating the value of the benefits being given up” (see below).

The Regulator states that advice on giving up safeguarded benefits should be based on the individual client’s circumstances and “backed up by robust financial analysis which looks at the differences between the benefits offered by the ceding scheme and the benefits being considered as an alternative to that scheme, irrespective of how those benefits are taken”.

The proposed rules have as a minimum:

  • an assessment of the client’s outgoings and therefore potential income needs throughout retirement
  • the role of the ceding and receiving scheme in meeting those income needs, in addition to any other means available to the client – effectively obtaining an understanding of the client’s potential cash flows
  • consideration of death benefits on a fair basis, for example where the death benefit in the receiving scheme will take the form of a lump sum, then the death benefits in the ceding scheme should also be assessed on a capitalised basis, and both should take account of expected differences over time
  • a comparator that enables the client to understand the value of the ceding scheme for their specific circumstances and compare this to the value of alternative options (see below).

The Regulator’s expectation also is that firms “must consider each client’s risk appetite and ability to manage investments when assessing the possible benefits from a potentially suitable receiving scheme”.

This includes where the plan is to withdraw funds and move them outside of a pension, eg, into another retail investment product or wrapper or cash. The Regulator has made clear that it considers taxation consequences should be “an inherent part of the consideration of crystallising benefits and accessing funds”.

The Regulator is also proposing to require a prescribed transfer value comparator (TVC) as part of the ‘appropriate pension transfer analysis’. This will require a calculation involving:

  • where relevant, a projection of the ceding scheme benefits to normal retirement age
  • the estimated cost of purchasing those benefits using an annuity, and
  • for those more than 12 months from their scheme retirement date determining the present value needed today to fund the annuity.

Within suitability reports, the FCA is proposing that the transfer value comparison is presented to clients in a prescribed way, as below.

 

These proposals, the Regulator said, were intended to result in “a significant shift in the quality of pension transfer advice”, where the financial analysis is not seen by some firms as a box ticking exercise, but becomes “a holistic part of the suitability assessment which can genuinely add value to the decision on whether to transfer”.

 

 

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