The FCA has issued Policy Statement PS 18/6, that contains new rules and guidance relating to ‘Advising on Pension Transfers’. The rules take effect from either 1 April 2018, 1 October 2018 or 6 April 2019. The key points are summarised below.

Effective from 1 April 2018

Pension Transfer Specialist (PTS)
The role of the pension transfer specialist when checking proposed advice on pension transfers, pension conversions and pension opt-outs has been redefined. Under the new rules, the PTS:

• checks the entirety and completeness of the advice; 
• confirms that any personal recommendation is suitable for the retail client in accordance with the obligations in COBS 9.2.1R to 9.2.3R and including those matters set out at COBS 19.1.6G; and
• confirms in writing that they agree with the proposed advice before it is provided to the retail client, including any personal recommendation.

COBS 19
Much of COBS 19 remains in essence, although the wording has been tweaked here and there.

In particular, the starting point for transfer advice that “the advice should start by assuming that transfer will not be suitable” remains firmly in place. The FCA had suggested that they would ‘change’ this starting point and some commentators have seen this as a U-turn by the FCA. In reality, the proposed ‘change’ used the phrase, “for most people retaining safeguarded benefits will likely be in their best interests” and, in our view, was not in any real sense a change from the original.

Either way, the advice needs then to only consider a transfer, conversion or opt-out to be suitable if it can clearly demonstrate, on contemporary evidence, that the transfer, conversion or opt-out is in the retail client’s best interests. Demonstrating that requires consideration of the following factors.

• the retail client’s intentions for accessing pension benefits;
• the retail client’s attitude to, and understanding of the risk of giving up safeguarded benefits (or potential safeguarded benefits) for flexible benefits;
• the retail client’s attitude to, and understanding of investment risk;
• the retail client’s realistic retirement income needs including:
  – how they can be achieved;
  – the role played by safeguarded benefits (or potential safeguarded
    benefits) in achieving them; and
  – the consequent impact on those needs of a transfer, conversion or
    opt-out, including any trade-offs; and
• alternative ways to achieve the retail client’s objectives instead of the transfer, conversion or opt-out.

Personal Recommendation
All advice on pension transfers, conversions or opt outs will be a personal recommendation and a suitability report issued.

However, if a firm arranges a transfer without having provided a personal recommendation it must make a clear record of the fact that no personal recommendation was given to that client and retain this record indefinitely.

Effective from 1 October 2018

TVAS is dead … long live APTA!

The biggest apparent change is the move away from TVAS and Critical Yield and their replacement by the Appropriate Pension Transfer Analysis (APTA) and Transfer Value Comparator (TVC).

The APTA does appear to have the potential to be more client friendly and easier to understand. It will include a TVC as replacement for the much maligned Critical Yield. The TVC is basically a comparison of the transfer value with the cost of buying an annuity in the UK market at scheme normal retirement date. The TVC is intended to give the client a clear indication of whether (s)he will be better or worse off after transfer – the annuity can generally be expected to cost more.

The comparison is more generic than the TVAS/CY reports in use currently and will be using a ’risk-free’ growth rate assumption to be a fair comparison with the ‘risk-free’ nature of the safeguarded benefits.

Comparisons should take full account of all charges that the client would incur following a transfer EXCEPT for:

• adviser charges paid by a third party (e.g. an employer); and
• adviser charges that would be payable whether the pension transfer or pension conversion happened or not (non-contingent charging).

Suitability Reports

• Any information in the Suitability Report relating to the PPF, FSCS, scheme funding level or employer covenant must be fair clear and not misleading and presented in a balanced and objective manner. This is intended to prevent advisers using scare tactics to influence the client to transfer. If a firm does not have specialist knowledge in assessing the impact of these factors, it should consider not including the information.
• If presenting any indication of future performance prepared using a financial planning tool, for example a cash flow model, that uses different assumptions to those shown in the key features illustration for the proposed arrangement, the report should explain to the retail client why different assumptions produce different illustrative outcomes.
• In any case, as at present, the growth rates used must be consistent with the reasonably expected performance of the proposed funds and also with other factors such as inflation.

Effective from 6 April 2019

There will be further changes to some assumptions permitted in comparisons. There is also likely to be further changes arising from feedback to CP18/7.

Note: references to transfer can also include conversion and opt-out as applicable under the rules.