Advising on Pension Transfers

There has been a huge increase in the amount of pension transfer advice being sought and given since the introduction of pensions freedoms in April 2015. While this has created significant opportunities for firms offering transfer advice, it has also introduced a whole new set of tricky questions for advisers to answer:

  • How should I deal with my client who wants to access cash at 55 when the critical yield is pretty high?
  • Are transfer values at a peak now?
  • Is critical yield relevant anymore?
  • What about insistent clients?
  • … and many more.

The PFS has published a really helpful Good Practice Guide to help advisers deal safely with transfers from defined benefit to defined contribution. You can access the guide here.


Transfer advice requirements

ATEB regularly reviews transfer advice given by our client firms and it is inevitable that we uncover weaknesses and problems with some cases. The purpose of this article is to share the most common issues we find and provide some hints how to avoid them.

Transfer advice is undoubtedly high risk, for firms as well as clients, so it is no surprise that the FCA takes a close interest in how this advice is provided. The primary source of rules and guidance is COBS19 and is a must read for those advising on pension transfers.

The FCA has also issued several alerts around specific unacceptable practices they have found during visits to firms and it is worth tracking these down too. The PFS guide includes many of the links required. One paper that is not mentioned in the PFS guide but is well worth reading is TR14/12. This thematic review paper includes many examples of good and poor practice.

The regulatory requirements around transfer advice can be summarised as follows.

Firms must obtain and provide to the client a TVAS. The TVAS must reflect the intended situation were the transfer to proceed, including the actual intended plan and investments; all related charges; the intended retirement age and the scheme NRD if the client is not there yet; whether the client wishes to take PCLS or not and so on.

COBS 19 also places a number of obligations on advisers making personal recommendations in respect of pension transfers. In respect of suitability, these include …

  • starting from a position that the transfer will not be suitable;
  • drawing the client’s attention to factors that do and do not support the advice – advantages and disadvantages – i.e. a balanced and fair presentation;
  • advisers should not regard a rate of return that might replicate the benefits being given up as sufficient in itself;
  • demonstrate that the advice is in the client’s best interests;
  • taking reasonable steps to ensure the client fully understands the advice.

It is against this background that we review cases. The most common issues are highlighted below.


What goes wrong with Transfer advice?

The TVAS is prepared using inaccurate charges or other assumptions

  • The TVAS should be based on accurate scheme information. If the client intends to take benefits early, do you know what the scheme’s early retirement factors are? If the client intends to take PCLS, do you know the scheme’s commutation factors?
  • The correct plan, fund and adviser charges must be used in the TVAS. If you do not know the target plan and /or funds you are not in a position to provide a personal recommendation.
  • If the target plan or funds change after the TVAS has been prepared, a new TVAS must be done.

The TVAS is not prepared on an appropriate basis

  • Similarly, the TVAS must reflect the intended target situation, should the transfer proceed. For example, if the client intends to draw benefits prior to scheme NRD then the TVAS should be done to the desired age and also to the scheme NRD.
  • If the client intends to draw PCLS then the TVAS should include a critical yield calculated on that basis.
  • The critical yield should properly reflect the client’s marital status and the actual date of birth of any spouse/civil partner.

 A TVAS is required for each separate scheme

  • This might seem pretty obvious where the client has, say, two deferred benefits from two different employers – a TVAS needs to be done for each scheme. But we also come across schemes with multiple elements. For example, a Barclays deferred member could have a deferred safeguarded benefit from the final salary scheme that closed a few years ago, and could also have some money purchase benefits from the scheme that replaced the DB scheme and could in addition have AVC benefits. Barclays allows these elements to be dealt with separately so it is not acceptable for a TVAS to be done only on the DB element and then assume that the other bits can be moved simply because of a recommendation to transfer the DB element.
  • Neither is it acceptable for the total TV of all three elements to be used as the TVAS should only relate to the DB element. The other two elements are money purchase and should be subject to individual cost comparisons as they represent a pension switch.

The critical yield figures are not analysed and presented to the client in a balanced manner

  • COBS 19 requires both advantages and disadvantages of transfer to be presented fairly and in a balanced manner.
  • Balance can be affected if the suitability report qualifies the impact of key factors. A common example would be where the critical yield is quoted but then dismissed as not important or not relevant.
  • Common reasons for dismissing the CY include …
    “you do not wish to buy an annuity” (How can you be sure years in advance?);
    “having flexible income/access to cash/leaving funds to next generation is more important to you”, (How clearly has the value of these features been compared against the value of lost guarantees?);
    “the FCA will be dropping the CY requirement soon because of pensions freedoms” (This has been mooted by various advisers since April 2015 but has not happened and, in our view, is unlikely to happen in the near future. For the time being the critical yield remains the best and only permissible means by which advisers can attribute some sort of quantification to the value of the guarantees the client would forego on transfer.

The comparison of the critical yield(s) with past performance is flawed

  • Usually because the past performance quoted is before fund and adviser charges – these can make a significant difference to how the client sees the potential for matching scheme benefits – published performance of 7% can easily reduce to 5% or even less when all charges have been taken into account;
  • Ensure that the performance quoted is over the most relevant recent period … there can be significant differences in five-year average performance between periods that are only a month or two apart.

Alternatives to transferring are not considered or are discounted inappropriately

  • Issues in this respect are often linked with poor identification of client objectives, specifically where the stated objectives are generic and product feature led such as the client wants to access cash at 55, have flexible income, leave funds to next generation etc.
  • The need for cash should be quantified and genuine. Where appropriate, the client must be challenged as to why it is necessary, at all or at the indicated time. The desire to pay for a daughter’s wedding or go on a cruise might be genuine and quantifiable, but is it in the client’s best interest to lose scheme guarantees in achieving this. Could there be other ways of raising the finance. Borrowing, using other assets, re-mortgage etc. should be genuinely considered and only discounted if discounting is credible.
  • Similarly, life cover should be considered in response to the leaving funds to the next generation aspect. And remember that, unless the client intends to draw little or no income from the fund,  the higher the critical yield, the less likely it is that there will be anything to leave for the next generation!
  • Even where the client has a genuine need for PCLS at age 55 or flexible income etc., if the client is years away from the time when that PCLS or income will be needed or available (especially for clients who are not yet close to 55) then what is the justification for doing the transfer NOW? 

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

Transferring a defined benefit pension fund can be high risk for the client. Transfer advice is certainly high risk for firms. Accordingly, the case for transferring a client’s pension benefits needs to be clear and credible.

The client objectives should be client specific and not product feature led.

The rationale for transfer, or not, should be client specific, not generic.

Consider whether the advantages and disadvantages have  been clearly explained in a balanced manner.

The TVAS must reflect the intended situation and assume accurate charges.

All relevant alternative solutions, including non-product solutions such as re-mortgaging or debt counselling should be considered or appropriately discounted.

Past performance must not be quoted in a potentially misleading way. The data should take account of all fund and adviser charges.

Ask yourself in what way the advice might be challenged in future.

Action Required By You

  • Ensure you are familiar with the requirements of COBS 19 and related guidance and alerts;
  • Read the PFS Good Practice Guide;
  • Ensure advice avoids the common failings indicated here;
  • Contact ATEB for further assistance.
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About the Author

Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

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