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.
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.
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.
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.
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.
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