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FCA Consults on New Rules Aimed at Improving Pension Transfer Advice

31 / 1 / 2018

In June 2017 the FCA issued a consultation paper (CP17/16) entitled “Advising on Pension Transfers”.

The declared purpose of that consultation is to bring the COBS rules into line with the new pension freedoms environment and equip advisers with a framework which will better enable them to give the right advice, so that consumers, in turn, will be empowered to make better informed decisions. The proposed rule changes will be restricted to pension transfers involving safeguarded benefits. Responses to the consultation were invited by 21 September 2017, and a Policy Statement is to be issued by the FCA in February 2018.

The Key Proposals

  1. In future all advice on conversion or transfer of safeguarded benefits will result in a personal recommendation so that the full force of the information, suitability and risk warning provisions in COBS 9 and 19.1 apply.


  1. Although it remains the FCA’s view that keeping safeguarded benefits will be in the best interest of consumers, it proposes that the existing guidance that an adviser should start from the assumption that a transfer would be unsuitable should be removed and replaced by the assessment of suitability by the adviser. The focus of enquiry therefore shifts to an assessment of whether the transaction is right for the individual client in his specific circumstances. The onus will be on the adviser to demonstrate that the transfer is in the best interests of the client, and in order to provide a suitable personal recommendation, an adviser will be required to consider:
  • The client’s income needs and expectations, and how these can be achieved, the role safeguarded benefits play in providing that income, and the impact and risk if a conversion or transfer is made;
  • That the receiving scheme and the investments being recommended within that scheme are appropriate to the risk profile of the client;
  • How the client will access the funds, immediately or in the future;
  • Alternative ways of achieving the client’s objectives;
  • The relevant wider circumstances of the individual.


  1. Advice on pension transfers, pension conversions or pension opt-outs will continue to be subject to the rule that it must to be given or checked by a pension transfer specialist. The FCA has criticised cases where the pension transfer specialist tasked with checking advice on transfer or conversion of safeguarded benefits has simply run the Transfer Value Analysis (TVA) calculation or has checked the numbers that have been produced. The proposed rules aim at tightening and focusing the remit of the specialist adviser. While checking does not require a fundamental repeat of the advice process, it involves an independent assessment of the soundness of the basis for the advice. The aim is to assess the reasonableness of the personal recommendation given by the adviser. The proposed new rules will provide that the checking process should take into account the client’s wider circumstances, including his appetite and capacity for risk and the nature of the scheme being transferred to.


  1. The existing rules are proposed to be changed to steer advisers away from focusing too much (or even exclusively) on the TVA, i.e. the comparison between the benefits being given up and the benefits available under the receiving scheme. The TVA calculates the rate of return  (also referred to as the critical yield) that is necessary to reproduce the safeguarded benefits that are being given up. The FCA has found that, even where the critical yield was determined correctly, firms were not properly explaining volatility and the transfer of risk to the client, and it has concluded that the TVA is no longer leading to the best outcome for consumers. The TVA is to be replaced by the “appropriate pension transfer analysis” (APTA). The APTA will require consideration of the client’s objectives and needs to be backed up by what the FCA calls “robust financial analysis” which looks at the differences between the benefits offered by the ceding scheme and the benefits being considered as an alternative to that scheme. The FCA will expect the appropriate analysis to include as a minimum:
  • An assessment of the client’s outgoings and therefore potential income needs throughout retirement;
  • The role of the ceding and receiving schemes in meeting those income needs, in addition to other means available to the client (savings/other investment income). The aim is to gain a proper understanding of the client’s cashflows.
  • A comparison of death benefits on a fair basis: e.g. where the death benefit in the receiving scheme will take the form of a lump sum, then the death benefits in the ceding scheme should also be assessed on a capitalised basis, to enable a meaningful comparison.
  • An explanation of the value of the ceding scheme to the client and a comparison with the value of alternative options. In addition to explaining what it means to give up guarantees and carrying the risk himself, the client should be provided with an understanding of quantitative value, so that he is able to understand the transfer value offered by the ceding scheme, and how much it would cost to purchase comparable benefits in a defined contributions scheme.
  1. In support of these additional explanations and to achieve the necessary understanding on the part of the client, the FCA proposes to introduce a prescribed transfer value comparator (TVC) as part of the APTA. The TVC will involve:
  • Where relevant, a projection of ceding scheme benefits to normal retirement age [Same as existing TVA process]
  • Establishing the estimated costs of purchasing those benefits using an annuity [Same as existing TVA process]
  • For those more than 12 months from their scheme retirement date determining the present value needed today to fund the annuity. [This is a new approach]. Instead of determining the required rate of growth, firms must determine an appropriate discount rate to value the amount needed to reproduce the safeguarded benefits. The calculated discount rate must be appropriate for each client based on his attitude to risk, irrespective of whether the proposed scheme will involve flexi access drawdown or purchase of an annuity.
  1. The FCA recognises that the TVC calculation (like the previous TVA) is based on the cost of purchasing an annuity (which is not what may clients now would wish to do), but the FCA considers that it is important that consumers are able to understand in value terms the potential costs of purchasing comparable benefits in a different environment. To that end, it is proposed that in future the suitability report must include the TVC in a prescribed format that:
  • Sets out the transfer value offered instead of the client’s pension income;
  • Compares the transfer value with the amount the client needs to buy the same income on the open market;
  • And, if the transfer value is insufficient to buy the same income:
    (i)         identify what the additional cost (in addition to the transfer value) that would be needed to replicate the existing pension benefits
    (ii)        include a statement that states clearly:“This means the same retirement income could cost you £X more by transferring”


  1. The new APTA will also apply to overseas transfers, and the FCA envisages that a UK adviser will need to work in conjunction with the overseas adviser to understand the proposed destination for the client’s funds. The FCA expects that the APTA for an overseas transfer will contain sufficient information in relation to the comparative financial and tax regimes in the two countries and the potential for higher inflation in the receiving country or exchange rate risks to erode higher projected rates of return in the receiving overseas scheme.



The FCA’s proposals are a welcome overhaul of the advisory framework and rules for the difficult area of pension transfers from defined benefits schemes into defined contributions personal pension schemes. The advice and analysis proposed to be reflected in the new COBS rules will go a long way to making a complex subject more transparent and understandable to consumers, equipping them better to make informed decisions about how to access their retirement savings. Advisers also should be more confident that the new framework rules will provide them with the tools to deliver advice that meets the FCA’s suitability criteria.

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