Unit 4 6 Burnt House Farm Business Park Bedlam Lane Smarden Kent TN27 8PG T: 01233 756 711 E: stacey@hdclimited.com W: www.hdclimited.com Policy Statement Advising on Pension Transfers Having reviewed the policy statement, this is my attempt to summarise it, which I hope you find helpful. It is of course no replacement for reading and reviewing the document, together with the further consultation paper also issued on 26 th March, yourself: https://www.fca.org.uk/publications/policy statements/ps18 6 advising pension transfers Executive Summary This brief overview, runs to two pages; further details can be found in subsequent sections. Effective 1 st April 2018 Suitability Guidance The policy statement does provide guidance on assessing the suitability of pension transfers, the requirements for which, come into effect from 1 st April 2018. Personal recommendation The firm is required to make a personal recommendation to the retail client confirming if the transfer is in their best interests. Transfer advice hurdle The statement confirms the regulator believes that most consumers will be best advised to keep their existing safeguarded or defined benefits. Advice requirements Advisers are required to fully consider the client circumstances and properly assess the various options. Other Aspects Pension Transfer Specialist The suitability report must be agreed with the pension transfer specialist before presentation to the client. The pension transfer must not be arranged (even if it means missing the guarantee deadline) before we have completed our analysis and confirmed we agree the transfer is the most suitable option for the client. Due diligence The requirement for advisers to undertake due diligence on any software is repeated within the policy statement though it is actually derived from MiFid II. The policy statement goes on to say that the adviser cannot use any restriction within the software to reduce their liability in relation to the advice. No Free TVAS The policy statement also confirms that the FCA have revised their rules and guidance to mirror the new MiFid II inducement rules. In their view it is unlikely that accepting free TVA or APTA software would fall within the narrower definition. This precludes free support from providers. We at HDC offer a TVAS only service for a fixed fee of 500. HDC is a Trading Style of Heather Dunne Consulting Limited. Registered in England and Wales. Company No: 4463389. Registered office: Units 4 6, Burnt House Farm Business Park, Bedlam Lane, Smarden, Kent TN27 8PG HDC December 2017
Information from schemes The regulator has also confirmed that they are aware there is a difficulty in obtaining the information required from schemes. Insistent clients Though this is mentioned, there is no detail in the policy statement. Opt outs The situation in relation to opt outs has been clarified. Overseas Transfers The regulator points out there are additional aspects to consider, especially as there may be two advisers; one in the UK and one offshore, involved in the recommendation. Furthermore, they are exceptionally complex. Advisers need to consider whether they are able to provide advice in this scenario. Streamlined advice The regulator states that it is unlikely that streamlined advice is appropriate for pension transfers. Effective 1 st October 2018 The other aspects suggested in the Consultancy paper last June are due to come into effect from 1 st October 2018. I ve summarised the two key points and then examined them in more detail later: The Appropriate Pension Transfer Analysis (APTA), will become a requirement; we are already taking account of the additional points it mentions, about the client circumstances, when assisting advisers with pension transfers. The Transfer Value Comparator (TVC) will also become a requirement. This is not yet available, because the assumptions and pertinent details were only published on Monday 26 th March. Effective 6 th April 2019 The alterations to the handbook incorporated in the policy statement include various changes to the assumptions within the transfer value comparator which will come into effect on the 6 th April 2019. Page 2 of 11
Details of changes Effective 1 April 2018 The policy statement does include specific guidance about assessing suitability. It also provides some details about a pension transfer specialist s responsibility. There are then various other aspects to be considered. Finally, the policy statement includes a series of changes to the handbook. Guidance for Assessing Suitability I have summarised the various sections relating to this below: The starting assumption remains that the transfer will be unsuitable Advisers must prepare a personal recommendation based on the consumer s needs and circumstances The transfer or opt out is only suitable if the firm can clearly demonstrate on contemporary evidence that the transfer is in the client s best interests Client circumstances to be considered include: Specified in COBS 19.1.6 o intentions for accessing pension benefits o attitude to and understanding of the risk of giving up safeguarded benefits o attitude to and understanding of investment risk o realistic retirement income needs including: how they can be achieved the role played by the safeguarded benefits consequent impact on those income needs of the potential transfer o alternative ways to achieve the client s objectives Mentioned in the policy statement o financial situation o investment objectives o knowledge and experience in relation to the investment field o current employer scheme o alternative ways of achieving objectives o partial transfers Note: If the adviser has insufficient information to assess suitability e.g. cannot establish income needs in retirement for younger client no personal recommendation should be made. It is essential that the pension review questionnaire you complete with the client, confirms the income needs in retirement and how that has been agreed, especially when the individual has a relatively long term to retirement. Page 3 of 11
Pension Transfer Specialist Role This is HDC s responsibility if you are one of our existing adviser clients: Check the entirety of the advice process, not just the numerical analysis and consider whether the advice is complete Confirm the personal recommendation is suitable Inform the firm in writing that they agree the advice before the report is issued to the client We always confirm our view in relation to the advice by email once the suitability assessment review has been completed. If our view is that the client should retain the existing benefits, that is the advice they should be given. Though your firm is responsible for the advice, we must agree it is the right advice. Unless an adviser can provide evidence to persuade us a transfer is the most suitable option, we will be required to prepare the report on the basis that the recommendation is to retain the exiting scheme benefits. This requirement to agree the advice seems to put some onus on HDC in relation to that advice. The alert issued last January confirmed it is the authorised firm, which is responsible for the advice, which, as I understand it, remains the case. I have sought regulatory guidance on this point. If we don t feel the transfer is suitable, we will prepare the suitability report on that basis. Opt outs The situation in relation to opt outs has been clarified. The requirements confirm: A pension transfer specialist is required only where the individual is considering opting out of the scheme offering safeguarded benefits opt outs must be recorded, irrespective of whether advice is given records are to be retained indefinitely The advice need only reflect the financial impact, it is not necessary to undertake an appropriate pension transfer analysis or prepare a transfer value comparator Overseas transfers The policy statement confirms that there are additional aspects to consider. In the regulator s view, they have provided sufficient guidance for the two firms scenario. They accept this is likely to occur in this situation because there will be one in the UK and another offshore adviser involved in the recommendation. Furthermore, the regulator points out that overseas transfers are exceptionally complex, because it will be necessary to consider all of the aspects relevant to UK transfer plus: characteristics of the transfer destination which make it different to a UK transfer tax considerations in the other country, including the impact of QROPS levels of returns local inflation rates especially relative to fluctuations in exchange rates Page 4 of 11
other exchange rate issues levels of charges on overseas arrangements differing legislative frameworks local levels of protection e.g. FSCS & FCA equivalent if the adviser is unable to get sufficient understanding of local markets they should point out the limitations in the advice to the client Advisers should consider carefully whether they are able to provide advice in this scenario. Information from schemes The regulator has also confirmed that they are aware there is a difficulty in obtaining the information required from schemes. There is an industrywide working group looking at this issue, to which I have contributed. When I last communicated with The Pensions Regulator, they indicated that they had now referred the results of their findings to the Financial Conduct Authority. I have sought an update from the regulator in this respect. Insistent clients The policy statement confirms that guidance for insistent clients is covered by PS 17/25 which was effective on 3rd January 2018. Streamlined advice The regulator states that it is unlikely that streamlined advice is appropriate for pension transfers. This is covered by separate guidance FG 17/8 published in September 2017 and updated on 8 th December 2017. https://www.fca.org.uk/publications/policy statements/ps17 25 famr implementation partii https://www.fca.org.uk/publications/finalised guidance/fg17 8 streamlined adviceconsolidated guidance Changes to the handbook Definitions Various adjustments to the glossary of definitions: new definition: advising on pension transfers, pension conversions and pension opt outs the following are extended to include pension transfers: o designated investment o security o specified investment Page 5 of 11
pension transfer specialist: change of definition to encompass external pension transfer firms like HDC Conduct of Business Sourcebook (COBS) Various adjustments to COBS: COBS 9 Addition of a specific provision relating to guidance on assessing suitability of pension transfers COBS 19 revised provision setting out when pension transfer advice is required referring to COBS 9 guidance on assessing suitability of pension transfers Requirements in terms of the comparison, which forms part of that personal recommendation to the retail client specific aspects, which should be taken into account requirement to record transfers undertaken without making a personal recommendation i.e. on an insistent client basis and to retain that information indefinitely an option to work on the basis that the changes effective 1 October 2018 have already been incorporated in the handbook Detail of Changes Effective 1 October 2018 The other aspects suggested in the consultation paper last June are due to come into effect from 1 st October 2018. I ve summarised the two key points and then examined them in more detail in turn: The Appropriate Pension Transfer Analysis (APTA), will become a requirement. This is a more extensive assessment of suitability. The Transfer Value Comparator (TVC) will also become a requirement. We understand O&M are making the relevant changes. Appropriate Pension Transfer Analysis (APTA) This is the new all encompassing term for the work involved in assessing the suitability of a transfer and preparing the personal recommendation. This requirement comes into effect from 1 st October; the Policy statement mentions: behavioural aspects current needs and circumstances client income needs in retirement relative to other means available to meet those needs tax especially crossing a threshold or band access to state benefits likely pattern of benefits from ceding and proposed arrangements consistent comparison of benefits and options Page 6 of 11
provision for a reasonable period beyond average life expectancy, in view of concerns about depletion of funds. Assumptions about mortality should be based on ONS records or similar unless evidenced by annuity quotations consider trade offs by prioritising different client objectives take into account the pension protection fund and the financial services compensation scheme comparative benefits in a balanced and objective way allow for scheme funding and employer covenants, to the extent that the adviser feels competent, but to maintain a balanced view critical yield approach may remain valid in some circumstances though the firm should be aware of the risks of using critical yield over uncertain future lifetimes where income would not be secure, where consumers may not understand it. Cash flow modelling tools may support the advice: o limitations of the software cannot be used as an excuse for limiting adviser responsibility o certain restrictions in relation to the assumptions used within such software o reasonable assumptions supported by objective data can be used o differing assumptions must be explained o One option is to use more cautious assumptions death benefits must be considered on a fair and consistent basis, though it is understood that it s challenging to compare a lump sum and an income based provision the illustrations must reflect o the investment potential of the intended assets o product charges o platform charges o adviser charges o underlying investment charges o any other charges applicable when benefits are withdrawn Charges paid for the suitability assessment either by the client or their employer, which are not to be deducted from the transfer value need not be incorporated in the illustration. projections involving purchase of an annuity have prescribed assumptions estimating benefits under the ceding scheme must also be based on prescribed assumptions any supplemental assumptions made by the firm should take into account consistency, together with the need to use more cautious assumptions where appropriate. Extra analysis such as cash flow and the like should not be given more prominence than the required Transfer Value Comparator This is not an exhaustive list; the client circumstances, will dictate which of these aspects or any others is most important. Page 7 of 11
Transfer Value Comparator (TVC) This is the new transfer value analysis report. The original suggestion included the ability to alter the assumed growth rates, fortunately that seems to have been removed, meaning that there will be some consistency irrespective of the source of the TVC. The idea is that this TVC will put the transfer value available into context, allowing the client to make an informed decision. The idea is to compare the cost of providing the same benefits in the defined contribution arena, so the client can see how much more expensive that will be. Currently, we quote that as a percentage growth rate, which we call the critical yield. Now it will be quoted in pounds and pence at the date of the transfer value. The regulator has stated that the TVC should not form the basis of the advice or be a simple rating factor for professional indemnity insurance premiums. The same applied to the critical yield, though not everybody seemed to appreciate that. The underlying assumptions will be detailed in the handbook, but can be summarised as follows: growth rate: risk free return using gilt yields product charges: 0.75% per annum adviser charges: ignored annuity cost: 4% annuity interest rate: revised every three months based on the average of two gilt yields adjusted by 0.5%. spouse/beneficiaries benefits: as in the current scheme mortality: Office of National Statistics records Comments on the assumptions By using a growth rate similar to gilt yields, the TVC should provide results on a similar basis to the scheme at least in relation to the discount rate. The actual product charges, adviser charges underlying investment cost and potential investment return will form part of the APTA, which examines the client s personal circumstances. It will be important that the expected investment return utilised in these figures is substantiated by objective data. Over recent months, we ve introduced the requirement to confirm an expected investment return and provide documentary evidence as to how that figure has been arrived at. The 4% annuity cost is exactly the same as currently used within the TVAS. The regulator believes this allows for charges including adviser remuneration on purchase of an annuity. As the charging structure of an annuity is opaque, it is difficult for any of us to argue that that is an unreasonable assumption. The regulator confirmed that they have sought guidance on this from the relevant providers and been advised it is appropriate. In the past, the annuity interest rate (AIR) was reviewed monthly, but based on 12 month rolling average, which meant it rarely changed significantly from month to month. The decision to revise AIR quarterly but based on much shorter time periods is likely to result in Page 8 of 11
more fluctuations. This does mean that the figures might change depending on the day the transfer analysis to provide the TVC is undertaken. I presume, that when they say the spouse and beneficiaries benefits will be as in the current scheme that will be on the same basis as in the TVAS. In other words, we will use the proportion promised by the scheme, but the actual date of birth of the spouse or partner, which will impact on the cost of the alternative annuity. In the scheme, the actuary applies a generic assumption. That is usually that a proportion of the scheme (e.g. two thirds) are married or have dependents; that they are not same sex partners and usually that men are three years older than women. Each scheme actuary will apply their own assumptions, but these are the most normal ones. The APTA will expand on the client s mortality, which means there is a need to assess how much their longevity differs from the norm. This will be relevant in terms of considering the TVC and also the cash flow projections prepared in conjunction with the client. We have recently introduced additional questions on the pension review questionnaire specifically designed to probe into the health and longevity aspect. Other aspects in relation to the TVC The TVC will be accompanied by required wording, which is adjusted slightly when the individual is within 12 months of the scheme normal retirement age. The TVC will also allow for the death benefits at differing ages. Presumably, this will be quite similar to the current graphical representation of the annuity cost of the ongoing income as against the projected value of the transfer value. The regulator has confirmed that the colours and scale of the TVC can change, though the y axis must be set at zero. O&M were participants in the consultation in relation to this and so are already working on revising their systems to incorporate the TVC format. The requirement to provide a TVC will still apply where the individual is looking to take benefits immediately after transfer if that is not at the normal retirement age. We will continue to incorporate a TVC, where the client does have the option to take benefits later, especially if they are only drawing Tax Free Cash, rather than fully retiring. I suspect that just as with the TVAS, this will not be possible when the member is at normal retirement age and they are unable to defer taking benefits from the scheme, because there will be no scheme projection to compare with. We will continue to supplement all at retirement cases with TVC where we can. Changes to the Handbook Definitions One adjustment to the glossary of definitions in relation to limited price indexation replacing transfer value analysis with appropriate pension transfer analysis. Page 9 of 11
Conduct of Business Sourcebook (COBS) Various adjustments to COBS 19: addition of definitions for appropriate pension transfer analysis, ceding arrangement, future income benefits, proposed arrangement, transfer value comparator requirement to undertake the appropriate pension transfer analysis and produce the transfer value comparator confirmation neither is required if the only safeguarded benefit is a guaranteed annuity rate requirement to take reasonable steps to ensure the client understands the key outcomes of the appropriate pension transfer analysis and transfer value comparator and how they contribute towards the personal recommendation sets out the steps involved in the appropriate pension transfer analysis referring to the new annexes 4A and 4C, which set out the prescribed assumptions confirms restrictions on supplemental stochastic modelling (e.g. cash flow) require assessment of the pension protection fund and the financial services compensation scheme, together with scheme funding and employer covenants to be presented in a balanced and objective way explain why the numerous projections differ due to the variation in underlying assumptions the requirement to provide a transfer value comparator and the associated assumptions, including reference to the associated wording required the suitability report should include an analysis of financial implications if it is in respect of an opt out, or a summary of the key outcomes from the appropriate pension transfer analysis if the recommendation is to transfer Addition our Annex 4A setting out the items which must be considered by the firm in undertaking the appropriate pension transfer analysis addition of Annex 4B and 4C, together with Annex 5R; setting out the details in relation to the transfer value comparator and the associated assumptions, the format and prescribed wordings Detail of Changes Effective from 6 April 2019 These changes are only covered in the adjustments to the handbook section of the policy statement, because they relate to changes in assumptions in the Transfer Value Comparator. TVC Assumption adjustments This section makes adjustments to Annex 4C, which sets out the assumptions to be used in the transfer value comparator. 1. increasing the assumption for the CPI index linked annuity rate by 0.5% 2. various alterations to the annuity interest rate for post retirement limited price indexation based on the CPI. 3. increasing the limited revaluation assumption for RPI to 3% from 2.5% Page 10 of 11
4. reducing the assumption for national average earnings from 4% to 3.5% 5. increasing the RPI assumption for revaluation from 2.5% to 3% Thoughts on how this will affect comparisons Increasing the assumption for indexation based on CPI (1 & 2) will increase the effective cost of purchasing benefits within the scheme. Increasing the revaluation assumptions linked to RPI (3 & 5) will increase the value of the projected pension due from the scheme. Conversely, reducing the value for national average earnings (4) will reduce the value of any guaranteed minimum pension due within the scheme. Overall, I would expect these adjustments to result in higher cost of scheme benefits and in current terms increase the critical yield. This will also increase the cost of matching those benefits under the new transfer value comparator. This will mean that the mathematical comparison will make a transfer look less suitable even if the transfer value being offered remains the same. Don t forget though, the regulator has confirmed again that the decision as to whether or not a transfer is suitable should not rely on this calculation but should be determined by the client s circumstances. Heather Dunne ACII FPFS Chartered Financial Planner HDC 4 th April 2018 Page 11 of 11