FG21/3 – Appropriate Pension Transfer Analysis (APTA)

COBS 19.1.2 states …


“To prepare an appropriate transfer analysis a firm must: 

(1) assess the benefits likely to be paid and options available under the ceding arrangement;

(2) compare (1) with those benefits and options available under the proposed arrangement;

(3) where the proposed arrangement is a personal pension scheme, stakeholder pension scheme or defined contribution occupational pension scheme that is not a qualifying scheme, and a qualifying scheme is available to the retail client, compare the benefits and options available under the proposed arrangement with the benefits and options available under the default arrangement of the qualifying scheme; and

(4) undertake the analysis in (1), (2) and (3) in accordance with COBS 19 Annex 4A and COBS 19 Annex 4C.”

This can be restated in plain English as:

“You need to know what the client has, what he might have instead and whether another scheme the client already has would be a perfectly adequate place to transfer to, if a transfer is otherwise an appropriate recommendation.”

Creating and explaining the APTA

The first point to note is that the transfer value comparator (TVC) report that firms obtain from third-party firms such as Selectapension is NOT the APTA. The APTA is the subsequent research and analysis that the firm undertakes using a variety of factors. The TVC is a mandatory metric but only one of a number of factors that need to be identified, quantified, prioritised with an appropriate weighting and compared. Each of the factors will vary from client to client, especially the weight given by the client to each of those factors. It is essential that the firm can show reasonable grounds for believing the client actually understands the implications of the various factors. To some extent, general suitability rules have long required ‘client understanding’ – being able to demonstrate the client is even likely to be ABLE to understand the risk involved with a recommendation is the fundamental objective of assessing the client’s investment knowledge and experience. However, COBS 19.1 rules, which are only about transfer advice, refer to understanding no less than 13 times, so it is fair to suggest that the FCA is serious about this aspect being a requirement for a transfer to be considered suitable.

So, it is not sufficient to simply assume, or even confirm, that the client gives more weight to say, flexibility rather than the guaranteed scheme benefits. Client preferences and objectives often need to be challenged in order to be able to show that the client settled on a preference or an objective in full knowledge of the implications. This is why FG21/3 goes into some detail on the need to actually explain the TVC. The FCA states:

“The purpose of the TVC is to give some context to the cash equivalent transfer value (CETV). Many consumers struggle to understand the underlying cost of a guaranteed income and some may even regard the CETV as more like a lottery win. The way you explain the TVC should help them understand the inherent value in their existing DB scheme.”

It is not sufficient merely to state the TVC and import the bar chart into the suitability report. Clients need to understand what it means for them yet, despite writing about this on our website and in the trade press, we still see suitability reports where there is either no explanation of the TVC and critical yields (CY) or where the explanation is inadequate, brief and 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.

We saw a case a couple of years ago where the client wanted to transfer so he could access the PCLS and clear his debts. The debt in question was a loan of £9,000 from British Gas for a new boiler. It had three years to run and was interest free. The TVC was well over £100,000! A reasonable give up? In the client’s best interest? Pretty unlikely.

Reports often contain a risk warning along the lines of, “If you transfer you will be giving up valuable guarantees.” That is all well and good and certainly 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’. FG 21/3 refers explicitly to this phenomenon.

“We know that many consumers exhibit present bias. This is where they value a lump sum today more than a future stream of income, even where the two are equivalent in value. So emotionally, many of them have already committed to the transfer and have plans for accessing the cash and spending it. Where relevant, the TVC offers you the opportunity to correct their misunderstandings and biases. You should make sure you do not reinforce their misperceptions or undermine the intent of the TVC.”

The adviser’s job is to counterbalance this human 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% or the TVC is proportionately large incurs a significantly greater ‘give up’ than the client with the 2% CY or a proportionately small TVC. There are degrees of ‘achievability’.

One of the good practice examples the FCA states in FG21/3 is where a firm used the phrase:

“You can think of the difference between the two numbers as the price of flexibility.”

We would go further and encourage the use of an appropriate adjective in front of ‘price’ in order to distinguish between a price, a high price and a very high price! Obviously, advisers will use their own phrases, but the key is to ensure the client understands what each of the factors weighing up whether a transfer is wise or not actually means.

APTA assumptions

There are specific things the FCA expects to be included within the APTA. In particular, firms need to assess the benefits likely to be paid and the options available under the DB scheme and compare these with the benefits and options under the proposed arrangement. This should be done using fair and consistent assumptions and taking account of all charges the client might incur.

FG21/3 includes guidance on the use of cash flow modelling. This guidance is entirely in line with our house view on growth assumptions which we wrote about in a previous article.

It is often the case that TVC reports (where a CY is also to be calculated) will use the ‘default’ assumptions of 2%, 5% and 8%. But, as we stated in the article, these are not default rates that can be used with no further thought in every case. In fact, the 5% is a MAXIMUM mid-rate and a lower mid-rate must be used where that would more accurately reflect the return potential of the recommended portfolio. The best source of an appropriate growth assumption is the KFI, as providers have to meet the rules when they prepare projections. For example, a 50/50 ‘balanced’ portfolio would, under the relevant rules, carry an appropriate mid-rate of around 3.75% before inflation. Generally, FCA guidance is that the KFI rates should be used in any other projections, including cash flow models to ensure consistency and minimise potential confusion. Other rates are permitted but only if there is objective data to support them – performance over the past five years would not be sufficient for the purpose.

Consideration of a workplace pension

The third rule in COBS 19.1.2 requires due consideration of an available workplace pension (WPS) as an appropriate destination for transfer.

In the APTA, advisers should compare the advantages and disadvantages of the proposed scheme and the relevant WPS default arrangement. This requirement applies even if there are circumstances where there may be consideration for not using a WPS, e.g. the client wishes to access the funds within 12 months and the WPS does not offer a decumulation option. The FCA would expect to see, among other things, consideration of:

  • whether the client needs a broad range of complex funds that require ongoing rebalancing, given their risk profile, and knowledge and experience of investing
  • the proposed product charges, including those for the underlying investments, with the actual charges in the WPS default arrangement, and how the level of charges could affect the income your client will ultimately receive
  • whether ongoing advice is necessary, given these points, or whether the client is likely to be better off taking ad hoc advice when needed

A WPS scheme should still be considered as available where it does not facilitate advice charges, including ongoing advice charges. If a transfer is recommended and includes a suggestion that the client requires ongoing advice, consideration should be given to the option of paying for ongoing advice outside the product.



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

It is obvious that a suitable transfer recommendation requires more than clients saying they wish to transfer. In fact, this starting point is often the root cause of poor advice. If the initial mindset of the client and the adviser is that ‘this is a transfer case’ then it will be dealt with as a transfer when the client’s need is not a transfer but an outcome that transferring would be but one way to achieve. There are often other options. A common desired outcome is to raise capital but this is immediately translated as ‘ you want to transfer and access the tax free cash’. Beyond pinning down clear, client specific objectives, the APTA should be a detailed thought process where all potentially viable options to achieve those objectives are sufficiently considered, and where the process and considerations are properly documented.

Action Required By You

Review your transfer advice reports to assess whether they adequately explain the key factors the client needs to consider. Is there evidence that client objectives and preferences have been challenged where necessary? Review assumptions made in any cash flow model or other projection prepared. And remember that there are other specific rules relating to the use of cash flow models. ATEB is constantly working with firms in relation to transfer advice, current and past. We have significant expertise in this area. Call if you would like to understand how we could help you.
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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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