The FCA’s proposals for DB transfer advice are being interpreted as relaxing the rules. But the jury is out as to whether they will make transferring easier or harder
At first glance the FCA’s new approach to DB transfers, unveiled in a consultation paper issued last week, looks like it should increase transfer volumes. The decision to scrap the Transfer Value Analysis approach and the acknowledgement that pension freedoms make transfers suitable in some situations where they would previously not have been on the face of it look like increasing the amount of transfers, not decreasing it.
But with advisers required to take a deeper dive into the holistic circumstances of the client, and against a backdrop of the FCA suspending transfer activity by some advisers, many experts believe that the jury is still out on the question of whether CP17/16 is good or bad for transfer business.
The consultation says the new proposals do ‘not represent a softening of our approach’, but does go on to say that pension freedoms mean that transfers will be suitable in some new scenarios where they would have otherwise not have been. That suggests a net increase in transfer activity as a result of the proposals.
Countering that dynamic are the proposed stricter requirements on suitability, requiring advisers to ensure they have modeled the clients outgoings and their ability to be able to meet these outgoings. Unless clients have regular income from another source, transferring could be less likely to be recommended. The consultation paper also gives higher priority to what the client needs than what they want. It says ‘a recommendation is unlikely to be suitable if it meets the client’s objectives but not their needs’.
The regulator proposes to replace TVA with an overarching requirement to undertake what it calls an ‘appropriate pension transfer analysis’ or APTA. Part of this process will be the inclusion of a prescribed comparator providing a financial indication of the value of benefits being surrendered.
That analysis will include 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 cashflows and consideration of death benefits on a fair basis.
The FCA is also proposing to replace the TVA with a new prescribed transfer value comparator (TVC). Like the TVA, the TVC will include a projection of the ceding scheme benefits to normal retirement age and the estimated cost of purchasing those benefits using an annuity. But for those more than 12 months from their scheme retirement date it will require that the present value needed today to fund the annuity is determined. This will require clients to be shown the actual cost of buying the same benefits with an annuity, and quantify in black and white any shortfall.
Willis Towers Watson senior consultant David Robbins says: “From the pension increase exchange space we have seen telling people that they may lose some value if they live a certain length of time might not deter them. But putting that cash value onto what is lost may have some impact. But on the other hand the FCA have made the wording more sensible so that the starting point is no longer in the client’s interest to not transfer.
“That may give advisers more confidence that they can proceed with advising transfers, particularly if they are worried about after the event comeback. But it is not clear which way transfer volumes are going to go as a result of this.”
While some firms are pulling back from transfers – Intelligent Pensions has suspended its transfer business following an intervention by the FCA – others are increasing their activity in the market on the basis of the new certainty on offer.
Chase de Vere had advised from the starting point that transferring is not in the client’s interest but has moved to holistically considering whether it is. Chase de Vere principle consultant, online and flex Sean McSweeney says: “We had been very cautious indeed on transfers, but we feel 100 per cent more comfortable doing so now. We had thought previously that all the holistic issues beyond the TVAS could become factors – now the regulator has confirmed that these are the factors that need to be taken into account, we feel more comfortable with advising on transfers.”
The consultation paper also reminds advisers that if they use provider software to assess a transfer’s suitability and then subsequently place the DC assets with that provider there may potentially be a risk of breaching COBS rules on inducements, commissions or conflicts of interest. This could arguably deter some advisers.
Further, while most firms give transfer advice on the basis of personal recommendations, those that currently do not will have to change their business models to ensure that they do in the future or exit the market says the regulator.
But despite these obstacles, EValue CEO Paul McNamara thinks the new rules will increase activity, and also increase the depth of advice. He says: “Based on our Pensions Freedom Index, we expect continued high demand for advice on DB transfers. With the right reforms in place, transfers will hopefully increase only for those where it is appropriate for their financial future and reduce for those for whom it would be detrimental.
“We believe that access to good quality guidance and advice in this complex area is crucial. Guidance tools provide employees with the opportunity to educate themselves on the advantages and disadvantages of their DB pension and to understand the new pension freedoms. But most importantly, employees should have access to an efficient and personalised advice process, underpinned by holistic analysis of all their options and the long term implications of any recommendations.”
Hargreaves Lansdown head of policy Tom McPhail agrees with Robbins that it’s too early to say what the impact will be on transfer business levels. He says: “We have debated this issue at some length and we are not sure what these proposals will do for transfer volumes.
“We do think they are sound proposals – these processes could lead to better outcomes for customers. One of the questions will be around the implementation process, how well advisers adapt to the new model, and how the regulator acts when it comes to implementation and enforcement.
“Basically the new proposals strengthen the obligation on the adviser to do a good job. In some circumstances that may enable the adviser to transcend the TVC recommendation and say there are other factors that make a transfer better. Conversely there may be situations where they decide that having looked into the entirety of the situation in some detail, they’ve come to the conclusion that it is not in the best interests of the client. So we could end up with a situation where it doesn’t increase or decrease the level of transfer activity, but hopefully makes the advice process for transfers that do take place more robust.
“It is also worth reflecting that the extra work involved may nudge up the price of advice a bit.”
Aegon public affairs director Steven Cameron believes there will be a net increase in activity, in part because advisers will now have more clarity around what the FCA expects from them, enabling them to build up supply to meet the current demand for advice on transfers. Cameron says: “Currently people are struggling to get advice on transfers. The proposals, which we think are very positive, should lead to more clarity for advisers and for PI insurers. That should help capacity to grow, leading to more transfers. Hopefully the new proposals will lead to less situations where the client and the adviser are in disagreement as to how to proceed. The old approach was creating excess caution, stoking pressure for insistent clients. Hopefully this will now lessen.”