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APTA-lutely Fabulous

by Damian Davies on 09·10·2018

At the start of the second week of the new requirements for Defined Benefit (DB) pension transfer analysis, it's worth having a quick recap.

This won't be the most scintillating article, but it's pretty important.

DB pensions are an unusual thing, in that people often refer to guaranteed benefits and low risk environments, when neither of these are necessarily accurate, particularly when you look at some of the scheme details.

Nonetheless, the regulators position could not be clearer.


The FCA's guidance continues to be that firms should start by assuming that the transfer is not suitable.


Interestingly, in CP17/16, the FCA proposed replacing the existing guidance that an adviser should start from the assumption that a transfer will be unsuitable (the 'starting assumption'). Instead, they proposed that this should be replaced with a statement in the Handbook that advisers should have regard to the likelihood that, for most people, retaining safeguarded benefits is likely be in their best interests.

This proposed change to the starting point has been dropped, however, largely in light of a review of DB transfers having high proportions of unsuitable advice.  In a sense, the industry has rather shot itself in the foot here, as the link between advice on DB transfers and the way that the advice is charged for has the potential to create more accusations of bias through contingent charging with the old starting point.

The FCA explained that an assessment of suitability should be completed on a case-by-case basis from a neutral starting position. The adviser should be able to demonstrate that the transfer is in the best interests of the client. We also proposed additional guidance to help advisers assess suitability.

Indeed, in most cases, DB pensions (and other pensions with safeguarded benefits) give valuable benefits which for many, are best being kept. A DB Pension can provide certainty, a risk-free income, together with inflation protection. However, whilst many advisers shy away from providing DB pension transfer advice, given the articles that adorn the press, there are often circumstances where a transfer of these rights is in the best interests of the client.

A firm should, however, only make a recommendation to transfer, if it can clearly demonstrate with evidence and robust analysis that it is suitable and in the best interest of the client.

In undertaking the analysis, new rules affecting Pension Transfer advice took effect from the 1st October 2018, replacing the old Transfer Value Analysis (TVAS) with the new Appropriate Pension Transfer Analysis (APTA) that includes a prescribed Transfer Value Comparator (TVC).


Appropriate Pension Transfer Analysis (APTA) - The New Rules

The Appropriate Pension Transfer Analysis carried out by a firmshould demonstrate the suitability of the recommendation and in conducting the analysis, just like any other personal recommendation, the firm should take into account the client's:

  • Objectives and intentions for accessing pension benefits.
  • Attitude to and understanding of the risk of giving up the guarantees and benefits of the ceding scheme.
  • Attitude to and understanding of investment risk.
  • Capacity for loss.
  • Realistic retirement income needs and an analysis of how those needs could be achieved. The analysis should include the part that the DB scheme would play in achieving their income needs and the consequent impact that a transfer would have on meeting those needs. It is also important to show any alternative ways of achieving the client's objectives instead of the transfer.

The FCA have not been overly prescriptive in terms of providing a detailed framework for the APTA. Although they have provided a level of guidance, the adviser still has flexibility to complete the analysis in a way which fits their client's individual circumstances.

The APTA should however include:

  • An assessment of the client's outgoings and potential income needs throughout retirement:

It is therefore important that your file can show that the client and their spouse/partner will be able to maintain sufficient income for life, taking into account inflation. This analysis should demonstrate how both the ceding and receiving schemes can be used to meet those income needs, in addition to any other means available to the client and therefore involves the use of cash flow modelling.

When conducting the analysis, consideration also needs to be given to the level of income the client needs to meet their essential living expenses and to ensuring that these are covered as far as possible with secure income.

It should be noted that whilst the use of software (such as cashflow modelling) is accepted, the FCA expects firms to fully understand the limitations of the software being used and to ensure these limitations are taken into account when assessing suitability, so that these limitations do not limit the adviser's responsibility for providing suitable advice. Any assumptions made must also be realistic.

  • Consideration of death benefits on a fair basis, for example, 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; and both should take account of expected differences over time.
  • A Transfer Value Comparator (TVC) -  is mandatory, is in a heavily prescribed format and must not be amended.

The TVC aims to show the client the 'value' of the benefits they are giving up - by showing the estimated value needed to replace the promised benefits from the client's DB scheme, assuming the investment returns are consistent with the client's attitude to risk and that they purchase an annuity on the open market.

This provides information to the client in a very user friendly graphical format and shows the client instantly how good the DB scheme is in terms of value for money and demonstrates how a transfer to a Defined Contribution (DC) pension is unlikely to be able to produce the same benefits as the scheme.  


Whilst the TVC is mandatory and is in a heavily prescribed format, the TVC is only part of the APTA and the FCA expects firms to fully account for client's personal circumstances when undertaking the APTA.

It is also noted that whilst advisers can also still use the critical yield approach (in addition to the TVC) in the analysis and suitability report, they need to be aware of the risks of using critical yield over uncertain future lifetimes where income would not be secure, or where clients may not understand it.

The APTA must also consider a reasonable period beyond average life expectancy, particularly where a longer period would better demonstrate the risks of the funds running out.


So, is the new Appropriate Pension Transfer Analysis (APTA) a step forward in improving the quality and suitability of advice for clients, or just thought up by another compliance job's worth with too much time on their hands?

The APTA is calling for advisers to make their analysis and report as robust, understandable and client friendly as possible, in demonstrating why the recommendations are suitable for the client's individual circumstances and the risks involved.

The new mandatory TVC in particular, provides information in a more client friendly, graphical format, giving them a measurable difference between the transfer value offered by the scheme and how much it could cost to purchase comparable benefits in a DC scheme.

This can only help clients in understanding the value of the ceding scheme and financial implications of transferring.  In our experience, complaints tend to come about where expectations have not been well managed, so this can also only be good for the adviser.

Whilst the prescribed nature of the TVC does not allow for personal circumstances such as individual marital status and tax free cash requirements, the TVC meets its objective in comparing 'apples with apples', providing clients with an illustration of the value of the existing scheme against equivalent benefits in a DC environment, to help them make an informed decision.  As there is usually no allowance for individual circumstances via the existing scheme (such as marital status), this means a consistent comparison can only be provided if the estimated value required for the Defined Contribution scheme ignores individual circumstances.

The adviser can then engage with the client in realistic discussions about their objectives, without any fear of being challenged on fudging the numbers.

In summary, as always any analysis involves the use of assumptions, which although must be realistic, are unlikely to turn out to match reality exactly.

The new APTA rules can only be a step forward, not only in improving the quality of advice, understanding and outcomes for clients, but also in protecting advisers from accusations of providing unsuitable advice and giving clients unrealistic expectations.