In the first instance, PTS should familiarise themselves with COBS 19. All guidance below is designed to build on this assumed knowledge.
In January 2017 the FCA produced a factsheet “Advising on Pension Transfers – Our Expectations”. This had a heavy focus on Transfer Value Analysis (TVA) and Critical Yield (CY), clarifying that PTS must identify the specific scheme the member is considering transferring into and the charges applicable to it.
PTS also need to consider the specific funds the member will use, the charges applicable to these and the assumed growth rate. The PTS is to use these to create the CY rather than a generic hypothetical receiving scheme and funds which could produce a different (perhaps lower) CY figure. If PTS fail to do this, FCA state “it is unlikely that the advice will meet our expectations”
However demonstrating the critical yield is achievable, or even easily met, will not meet the FCA’s expectations on justifying a transfer. The CY is simply one of many aspects to consider when determining whether a transfer meets the client’s needs and objectives. In fact there may be instances where the critical yield looks wholly unachievable but the PTS still recommends a transfer as pension freedoms meet the client’s needs and objectives better than the DB scheme.
In February 2017 the Personal Finance Society (PFS) released their good practice guide on “pension transfers from defined benefit to defined contribution”. At only 8 pages long it is a valuable resource to anyone who deals with clients who are members of DB schemes, even for advisers who don’t hold pension transfer permissions.
The paper references recent guidance from the regulator, key messages from the FCA including those around insistent clients, and as you’d expect from a good practice guide, a list of suggested good practices when advising on pension transfers.
These good practices include gaining a thorough understanding of the DB scheme and the benefit structure it offers; considering the wider tax issues of the client; and completing detailed analysis of the client’s retirement income needs.
The final good practice point seems to capture the overall sentiment of the guide. Headed Part of wider, full financial planning service, it says where practical, advice on a DB transfer should be done in the context of a full financial planning service that:
In April 2017 the FCA announced their intention to produce a consultation paper on pension transfers, although no definitive timeframe has been quoted for its release. Until then, the documents referenced above provide the best guidance we have on how to meet the expectations of both the client and the regulator when dealing with pension transfer enquiries.
Business Development Manager
Justin Corliss is a Business Development Manager with Royal London. Justin started his working life in his native Australia where he worked for the Commonwealth Bank of Australia in client facing mortgage roles. Since moving to Scotland in 2002 he has held positions as a broker consultant for both Scottish Widows and Scottish Life dealing predominately with pensions. Before assuming his current role he worked as an Employee Benefits Consultant with a private firm. Justin holds the Chartered Institute of Insurance Advanced Diploma in Financial Services including AF3.