Transfer Value Comparator (TVC) – when is it required?

What is the TVC?
The TVC is a comparison of the Cash Equivalent Transfer Value (CETV) offered by the client’s pension scheme against the cost of purchasing the same income via an annuity on the open market at the scheme’s Normal Retirement Age (NRA).

The TVC assumes a no risk scenario in the run up to retirement (unlike Critical Yield (CY), which assumes that the client will be subject to investment risk and also takes account of adviser charging and target destination product costs). The assumptions used to discount the transfer value back from NRA to the client’s current age are based on gilt yield returns and assumed product costs which, at the time of writing are 0.99% investment returns and 0.75% product costs.

The TVC is shown as a graphical representation of the value of the safeguarded benefits the client would give up on transfer. A copy of the TVC report must be provided to the client. Regardless of whether the TVC graphic (and accompanying notes) are copy/pasted into the suitability report, the report should always include a clear explanation of the implications of the TVC for the particular client.

When is a TVC Required?
In relation to personal recommendations for pension transfers and conversions, COBS 19.1.1(2) states:

 “Before making the personal recommendation the firm must … carry out the appropriate pension transfer analysis and produce the transfer value comparator.” 

(Note that the requirement to produce a TVC does not apply if the only safeguarded benefit involved is a guaranteed annuity rate.) 

Therefore, the simple answer is that a TVC is required in all circumstances where safeguarded benefits are being transferred to a flexible environment, unless the safeguarded benefit is a guaranteed annuity rate. However, we are aware that some of the TVC software providers do not allow for a TVC to be run where the client is beyond, or even close to, scheme NRA, leaving the question of how firms should deal with this situation.

TVC when a client is beyond NRA
There are indications that some software providers have acknowledged the problem and are working on a solution to resolve it – indeed one of the well known firms appears to already accomodate TVC calculations for clients who are at or beyond NRA. Firms need to discuss this aspect with the relevant software provider to understand any limitations of the software being used. In the event that the software currently used does not allow for a TVC to be created for clients at or beyond NRA, firms cannot simply shrug their shoulders and do nothing. COBS 9A.2.9 requires firms to, “ensure that all tools … employed in the suitability assessment process are fit-for-purpose and are appropriately designed for use with their customers, with any limitations identified and actively mitigated through the suitability assessment process”.

So firms need to consider how to overcome any limitations in the TVC software used and perhaps consider whether to use alternative software that does not have the limitation. Otherwise, as a minimum, we would typically expect to see a comparison of the CETV with the cost of providing the scheme income through an annuity on the open market, using all the standard scheme assumptions (i.e. escalation, 5 year guarantee period, spouse benefits), with the results being presented to the client in the suitability report, with appropriate commentary included.

Should firms still use CY?
Although TVC was intended to address advisers’ concerns that some clients found CY hard to understand, TVC is essentially just a different way of presenting the CY concept. A ‘feature’ of CY was that it produced very high critical yields close to or at the point of retirement, which may have potentially been misunderstood by the client. This issue does not apply with TVC, which is why TVC is ALWAYS required and always produces a meaningful, consistent way of presenting the value of the scheme benefits to clients, even where the client is at or beyond NRA.

FCA Policy Statement PS18/6 outlined the FCA’s position regarding CY which is essentially that it is up to individual firms to decide whether a CY approach remains valid for the purposes of the APTA. ATEB firmly believes that, in  most cases, it will be helpful to use TVC and CY in conjunction to maximise the likelihood that the client understands the financial implications of transferring. As with TVC, these implications should be interpreted and explained clearly in the suitability report.

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

We have received a number of queries around when a TVC is required. Having considered the rules and commentary from the FCA, it is clear that a TVC should be run on every DB transfer case, including where the individual is close to, at or beyond NRA.

However, firms need to understand and mitigate any limitations in their chosen TVC software.

While the TVC is the primary metric that must be used for comparison. ATEB believes that CY still offers a useful additional way to help clients understand the financial implications of transfer provided the client is not at or beyond NRA.

Action Required By You

  • Speak with your software provider to understand any limitations in the software and identify if and when the limitations will be addressed – the obvious limitation being an inability to calculate TVC for clients who are beyond NRA;
  • Consider whether your firm’s existing approach is compliant and in line with COBS 19.1.1;
  • Speak with your ATEB compliance consultant or contact ATEB here.
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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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