Pensions transfer advice – ensuring client understanding

10 November 2019

How can you ensure a client understands the advice and the recommendations being made in a pension transfer case? ATEB Consulting’s Steve Bailey looks at what COBS says, highlights where advice firms make mistakes

A wise person once said, “The best advice is the advice that the client understands and the best outcome is the outcome the client expected!”

It is difficult to argue against that!

The need to ensure client understanding is referred to throughout the various suitability rules. With regard to transfer advice, COBS 19 is even more explicit:

“The firm must take reasonable steps to ensure that the retail client understands how the key outcomes from the appropriate pension transfer analysis and the transfer value comparator contribute towards the personal recommendation.”

” … factors a firm should take into account include … the retail client’s … understanding of the risk of giving up safeguarded benefits”

” … the retail client’s … understanding of investment risk”

We often see recommendations to transfer a defined benefit pension where that certainty of understanding is unclear. Here are some examples.


  • Key factors are not explained

By any measure, the Transfer Value Comparator (TVC) and the Critical Yield (CY) are key factors. And by any measure, they are technical concepts that most clients will only understand to the extent that the suitability report explains them in plain English.

Yet we often see reports where the TVC is stated but not explained. Many reports do not refer to CY at all or, where it is stated, there is no explanation. Since 1 October 2018, the TVC has replaced CY as the primary metric required by the rules. However, the TVC report will usually still show the CY and our view is that it remains of value in helping clients to understand the value they are giving up in the event of transfer.

  • Inadequate explanation

The TVC and CY are stated and accompanied by a VERY brief ‘explanation’, not in sufficient detail to ensure the client is likely to understand the full financial implications of transfer. Usually, the brief ‘explanation’ is little more than a comment as to whether the TVC or  CY is ‘achievable’ or not. But merely stating that a yield of X% is ‘not achievable’ does not do the job! The client needs to understand that the CY of X% or the TVC of £X is a way of representing the value that is being given up and it is important to make clear to the client what (s)he is giving up.

Reports often contain a caveat along the lines of,

‘If you transfer you will be giving up valuable guarantees.’

That is all well and good and better than no risk warnings at all but what is really needed is a client specific explanation of the financial implications for that particular client.

The client might well simply compare a future guarantee against the prospect of an immediate £1M transfer pot in his/her own hands. There is a lot of research to show that people are predisposed to giving more weight to an immediate rather than a future ‘benefit’. The adviser’s job is to counterbalance that predisposition by challenging clients as appropriate and by discussing and explaining the key questions. In the case of transfer advice, it is the COST of accessing that tempting pot that must be considered. That is what the TVC and CY figures, accompanied by a clear and effective explanation, can help you demonstrate. Consider different scenarios – critical yield, 2%, 5%, 8% 15%, 25% and the related TVC figures. In each of these cases, the client would ‘give up valuable guarantees on transferring’. That merely stating this is insufficient is obvious from the fact that the client where the yield is 25% incurs a significantly greater ‘give up’ than the client with the 2% CY.

  • Unbalanced explanation

There are two ways that the explanation can be unbalanced – report ‘acreage’ and diminishing.

  • Acreage

A report that devotes a few lines to the financial implications and risk of transfer and a few pages to the benefits of transfer sends a clear message that transfer is preferable. It is essential that the pros and cons of both transferring and retaining the scheme benefits are given appropriately balanced ‘air time’ so as to avoid the report being skewed, for example, in favour of transfer despite all evidence pointing to not transferring being the most suitable outcome.

  • Diminishing

More common is the presence of what we call ‘diminishing text’ That is text, included as part of the explanation, that, deliberately or otherwise, has the effect of diminishing the relevance or importance of the aspect being explained. A typical example is, “However, the TVC/CY is based on a client buying an annuity. You do not intend to buy an annuity so it is not particularly applicable.” or similar.

No matter how good the explanation is otherwise, including such text effectively negates a key factor that should always be considered. In the example above, whether the client intends to buy an annuity or not, the TVC/CY metrics remain a valid element of the situation that should not be ignored or dismissed.

Our view

Rationale for any personal recommendation should always be clear and balanced, putting the client in a position to make a genuinely informed decision as to how best to proceed.

Transfer advice in particular involves a lot of technical content and the suitability report should explain those technicalities accurately and in plain English.

Without explanation, the advice is open to future challenge as to how well the ‘client understanding’ requirement was satisfied.

A poor explanation, or one that is unbalanced or diminished is arguably even more likely to be open to challenge.

Suggested action points

  • Review how well suitability reports aim to ensure client understanding;
  • Create accurate and balanced explanations for key elements of the advice, in particular for transfer advice, explanations of the implications of TVC and CY for the particular client;
  • Avoid the issues raised here.

Professional Paraplanner