New FCA rules on pension transfer values set to shake up transfer market

24 October 2018



Our new policy paper with Lane, Clark & Peacock explains how FCA rules on pension transfer advice bring significant change in the member-adviser conversation.

From 1 October 2018, advisers need to show their clients a transfer value comparator (TVC) which compares the cash equivalent transfer value (CETV) their company pension scheme has offered, with the lump sum needed today to buy an equivalent retirement income. The TVC is based on the assumption that the transferred money is invested in ‘risk-free’ assets until retirement then used to buy an annuity. The rules also include all pension plans including safeguarded benefits. 

The two figures will be shown as a bar chart, with the TVC figure almost always being the higher of the two. 

What did the research tell us?

  • For members ten years away from retirement, the transfer value on offer will on average only be around 55% of the full value of the pension given up, according to the FCA methodology.
  • The range of transfer values offered by different schemes is very large, with some schemes offering transfer values as little as 40% of the full value and others offering transfer values of more than 80% of the full value. There are good reasons for this but it may come as a surprise to some members.
  • For members within a year of retirement, the transfer value on offer will typically be higher with an average transfer value being around 75% of the ‘full value’ of the pension given up.
  • As most Occupation Pension Schemes (schemes) are closed to new members, the typical average age of a member across most schemes will increase.  As a result, the transfer values are also likely to increase as schemes (with older members) gradually change their investment mix towards lower risk, lower return assets. The lower expected return impacts the discount rate, likely reducing it. This would increase the CETV offered as a proportion of the cost of replacing the benefits being given up.

You can read the full policy paper for more details. 

What did your peers think?

Advisers surveyed were generally in favour of the new way of talking to clients about whether transfers are a good idea, with most agreeing that a comparison between two lump sum figures was easier to understand than the concept of a ‘critical yield’ often used in advice conversations. Most advisers felt that the new TVCs wouldn’t have a major impact on the volume of transfers. But it’ll prompt them to explain more about the level of risk that those transferring are taking on.

The paper suggests that greater clarity about the ‘generosity’ of transfer values offered by different company pension schemes could cause trustees to review their policy on transfer values. Schemes offering the most generous transfer values (relative to the new FCA benchmark) might ask themselves if they need to be as generous to those leaving the scheme, whilst those with the least generous transfer values might face pressure from members to increase the amount on offer.  In addition, where a client has rights under more than one DB scheme, the relative generosity of the transfer value on offer from each scheme could be a factor used by advisers in deciding which transfer to prioritise.

How could this impact you?

The TVC will be more helpful than ‘critical yield’ to demonstrate that the current huge transfer values perhaps aren’t as great as they first appear. And it’ll help demonstrate that the nearer a member gets to scheme's normal retirement date, the better the value of the CETV represents as a proportion of benefits forgone. This is referred to in the paper as the cost of flexibility.

Our view

With around 200,000 people having transferred out of a company pension in the last few years, and thousands more doing so every week, it’s vital they have a clear understanding of the valuable benefits they’re giving up. If this new way of talking about transfers leads to better outcomes for clients, this would be a good thing. 

Your usual Royal London contact can help you use our tools and give you information about our performance and the impact of charges. 

Source: What will the FCA’s new rules mean for DB to DC pension transfers? A policy paper from LCP and Royal London, October 2018 

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