The FCA’s proposed new Transfer Value Comparison (TVC) has come under fire for focusing scheme members’ minds on a single large figure without giving due weight to long term income needs and ignoring tax-free cash, the health of the individual and scheme sponsor risk.
The time limit for submissions to the consultation on the FCA’s proposed new rules closed earlier this week. The Pensions and Lifetime Savings Association has warned that the proposed rules’ focus on a single cash figure places too little emphasis on other factors. It has also warned that the current uptick in transfer enquiries has been fuelled in part by scam operators promising pension liberation.
Hymans Robertson has warned that the new rules do not take account for the fact that most people take their tax-free cash and won’t buy an annuity.
Aegon has warned that the new rules, which require a more holistic approach to transfer advice that brings together both the transfer value advice and the client-facing adviser’s recommendations on what to do with the transferred pot, could be too cumbersome and increase cost. It has called for a ‘pre-advice breakpoint’ that allows the adviser to disengage part-way through the advice process if it becomes clear the individual is not going to be recommended a transfer.
PLSA policy lead, engagement, EU and regulation James Walsh says: “The PLSA agrees with the FCA’s argument that advice should be more broadly based. It is vital that members consider their DB rights in the context of their overall circumstances, including their other assets, debts, health, family circumstances and strength of their employer.
“However, there is a risk that the proposed new Transfer Value Comparison, which would focus the member’s attention on a single set of figures, could inadvertently lead to people taking decisions which are, in fact, quite narrowly based.
“Combined with the high transfer values generated by current low interest rates, this could lead to more people transferring. The TVC should be used with caution – and should be presented in the context of the full range of factors that scheme members need to consider.
“Worryingly, one spur to activity in the DB to DC transfer area has been the increase in pension scams. Although many people are presented with transfer options quite legitimately, scammers are also using DB transfers to part people from some or all of their hard-won retirement savings. Under these circumstances, the FCA is right to ask whether the current advice requirements are still fit for purpose.”
Hymans Robertson head of member options Ryan Markham says: “It is vitally important that any advice framework is underpinned by the right analysis. This should include an income needs analysis, to ward off the risk that the individual runs out of income in old age. This would assess the split between guaranteed income to meet essential living and variable income needs above this. It would also look at alternative scenarios of income under a range of investment and life expectancy scenarios so members really understand the risks. We should strongly reject any attempt to hone in to a single number as proposed under the mandatory transfer value comparator (TVC) – that would be a dangerous path to tread with similar failings to the current critical yield transfer value analysis. Any analysis needs to be tailored to the individual to ensure it is relevant to their situation and needs – cash-flow analysis needs to form the bedrock of this.
“With the mandatory introduction of the TVC, if there is no intention of purchasing an annuity, requiring hundreds of pounds to be spent on detailed analysis of the costs of purchasing one seems unhelpful. It also seems to suggest that advisers must ignore both the health status of clients and the likelihood that the majority will choose to take tax free cash, which 9 out of 10 individuals do. A further failing is that the comparison ignores the risk that the DB pension is exposed to sponsor insolvency risk, which for some members will be a material consideration – recent high profile DB scheme failures have shown this. It would therefore appear that the TVC neither represents a fair representation of the value of the benefit being given up, nor for most members the benefit they intend to take. It seems unfortunate the FCA feels required to enforce this TVC at all. In some situations it is probably deeply unhelpful and in all cases it will be costly. The industry must approach this with caution.
“It’s vital to have a clear advice framework that supports quality advice reflecting the specifics of each individual. In this regard the proposals are welcome. However, without modification, mandating a TVC could mean that these proposals do not move the advice landscape on quickly enough to support the real and ever increasing need from members.”
Aegon pensions director Steven Cameron says: “While more robust, there’s a danger the new approach could take longer, placing upward pressure on advice fees. To counterbalance this, if it’s clear at an early stage that the adviser won’t be recommending a transfer, the FCA should allow a ‘pre-advice breakpoint’. The adviser could save time and their clients unnecessary fees if they can agree early on not to proceed to advice.
“With many individuals having frozen benefits in more than one DB scheme, the FCA should recognise that leaving one or more alone while transferring others will be the best advice for some. Advisers are well equipped to offer ‘pick and mix’ advice here.
“Advisers currently face inflated PII premiums if advising on DB transfers. Regulatory clarity should reduce the risks of unsuitable or flawed advice meaning there’s scope for PII premiums to reduce, allowing more cost-effective advice. Together with a pre-advice breakpoint, this could allow more advisers to support more individuals in a market where demand for advice far exceeds supply.”