a positive step but is it enough?
FCA Policy Statement on Pension Transfer Advice
21 May 2018 - Estimated reading time: 3 minutes
The FCA has published its widely anticipated Policy Statement (PS18/6) to support financial advisers in giving the right advice so that consumers make better informed decisions on DB to DC transfers.
With the number of individuals choosing to ‘cash in’ their final salary pension quadrupling since the pension freedoms were introduced1 this guidance is welcomed by the industry.
While most of the recommendations in the PS appear good common sense and are no doubt already being adopted by the majority of reputable advisers, there are some interesting points to note.
It is common currently for investment platform providers to offer ‘free’ tools to financial advisers to support them in the financial analysis that forms a part of their overall advice recommendation. These tools are now classified as inducements, so advisers will have to source and pay for such tools directly. While this approach appears consistent with the objective of improving transparency in the advice market, we hope it won’t reduce the availability of these tools and ultimately delay access to quality advice for members.
A new ‘value metric’ for advisers has also been introduced - the Transfer Value Comparator (TVC). This is a calculation that advisers must undertake and consider in their overall advice recommendation. The TVC is intended to reflect the risk free cost of replicating the DB pension given up in the annuity market. Disappointingly, the TVC makes no allowance for a member’s personal circumstances including health or marital status and will need to be produced regardless of whether a member actually has an intention of buying an annuity. It may therefore be of limited use to members, and advisers will likely need to supplement this generic calculation with analysis reflecting the member’s specific circumstances.
It’ll be interesting to see how this additional analysis impacts the costs for advice and also the weight given by financial advisers to this metric in the overall advice recommendation. In particular, cliff edge advice guidelines on critical yields have highlighted that any analysis that results in a single regulatory metric will drive advice recommendations, potentially to the detriment of consumers. Therefore, it’s of vital importance for this new metric to form part of a balanced advice recommendation which is ultimately driven by a consumer’s specific circumstances and needs.
We’re surprised the statement lacks specific guidance around sponsor default risk in a defined benefit scheme. In light of recent high profile insolvency cases, the term ‘guaranteed’ in relation to DB pensions has been diluted, and advisers need to give this risk greater focus in the advice process. Without proper consideration and documentation of this risk, this feels like an area of challenge further down the road for financial advisers.
We are also surprised that the use of stochastic models in the advice process does not feature more prominently. It is clear that stochastic modelling has a key role to play in better informing consumers on key risks such as outliving their pension savings – i.e. ruin risk. As an industry we need to work towards presenting the output of this modelling in a way that consumers understand it so it enhances rather than complicates the advice process. Putting this in the ‘too hard’ box just isn’t good enough.
The FCA also decided not to introduce a neutral starting assumption for whether a DB to DC transfer could be right for a consumer. Retaining the existing starting assumption that a transfer will be unsuitable was no doubt driven by failings in relation to the British Steel case where members were picked off by unscrupulous advisers and outcomes suffered. Retaining the existing stance may serve as a useful reminder to the risks involved for all parties in this area.
The FCA is now consulting on further improvements to the advice process through Consultation Paper CP18/7. We welcome the proposals in the consultation paper, particularly in relation to the industry having an informed debate on contingent charging. We’ll be producing a full consultation response ahead of the 25th May deadline, look out for more to come on this.
1 Transfer figures across Hymans Robertson's client base