Pension Transfer Changes & TVAS

by on 01·12·2015

The FCA has instigated two important changes to pensions transfer advice:

1. Whether a transfer is for the immediate vesting of benefits or not is now irrelevant, a transfer that would previously not have been a pension transfer as it was for uplifting benefits will now be treated as a pension transfer.
2. Conversions have been added. This broadly means transferring or taking benefits from schemes with safeguarded benefits, so bringing them into the flexible world.

This means a big change for some Advisers as advising on non-occupational business or immediately vesting occupational business has never before needed pension transfers permissions.

On the other hand, the rules have removed the need for a Pension Transfer Specialist for Occupational Defined Contribution benefits without safeguarded benefits (I have made an attempt to explain these below!)

FCA COBS Requirements

COBS has detailed requirements which must be followed before a pensions transfer specialist can advise on a transfer. The firm has to;

• Compare the benefits which are likely to be paid under the defined benefits scheme with the benefits payable under the PP/stakeholder and give the client a copy of this comparison highlighting factors which support or do not support the firm's advice; and
• Give the client enough information to make an informed decision but also try to make sure that the client understands the comparison and the advice given.

TVAS

These changes mean that a Transfer Value Analysis (TVAS) is required on all transfers of safeguarded benefits (except GARs) to flexible benefits, including advice on transfers from DB to Occupational DC schemes as well as transfers from DB to personal pension and stakeholder schemes. TVAS is also required for pension conversions, including when a client seeks immediate access to their pension savings.

TVAS is not required on transfers from DC schemes without safeguarded benefits or on switches between personal pensions without safeguards. TVAS is also not required where immediate benefit crystallisation happens at the DB schemes normal retirement age, but is required if benefit crystallisation happens before NRD.

A TVAS is an automated system which calculates the investment return which is required from a personal pension fund to provide the same benefits as those given up by transferring. The system is dependent on demographic and economic assumptions. These are detailed in COBS.

TVAS Assumptions

Certain assumptions are required to be able to calculate the critical yield. Currently they are;

• Annuity interest rates - this is set by the FCA and is the way in which future pension payments are valued (COBS 19.1.4 and COBS 13 Annex 2 3.1R (6));
• Revaluation rates - this currently set as RPI - 2.5% and AEI (Average Earnings Index) - 4% (COBS 19.1.4);
• Indexation/escalation rates for RPI linked benefits - this is currently 2.5% (COBS 19.1.4);
• Indexation/escalation rates for CPI linked benefits - this is currently 2.0% (COBS 19.1.4); and
• Mortality - Institute and Faculty of Actuaries' Continuous Mortality Investigation tables PCMA00 and PCFA00

http://fshandbook.info/FS/html/handbook/COBS/19/1

The FCA has advised that they will review later in 2015 whether a full review of the TVAS requirements is required. These were last amended in 2012. A change in the assumptions can have a major impact on the critical yield required. More cautious assumptions can also be used.

For example, an increase in the annuity interest rate would mean that the amount of capital needed to provide the same annuity would decrease and the critical yield would decrease. If mortality improves then the critical yield would increase.

A key point is that meeting the critical yield does not guarantee matching benefits. For benefits to match all assumptions need to be met identically.

The critical yield could be exceeded and benefits not matched if the other assumptions are not met. Conversely, the yield may not be achieved but benefits matched due to a compensating change in other assumptions.

The assumptions are by their nature subjective and likely to change as they include matters such as expected inflation and changes in average earnings.

Although CETVs are issued with a guarantee date on them there are occasions when the value may change prior to this date. In these circumstances it is important to have the TVAS completed again to ensure it is up to date. One reason for a change in CETV is that the member may have secured some or all of the benefits thereby reducing the liability. Where this happens the cash equivalent is reduced (perhaps to nil if all benefits have been taken).

Safeguarded Benefits

The term safeguarded benefits are referred to within the rules for both pension transfer and pension conversion. So what are safeguarded benefits?

In the Pensions Schemes Act safeguarded benefits are explained in the negative, i.e. benefits other than:

• Money purchase benefits, and
• Cash balance benefits.

It should also be remembered that the HMRC definition of money purchase benefits and the DWP version are, knowingly and consciously different.

The Policy Statement confirmed any other type of benefit will be regarded as safeguarded benefits, including:

• Defined Benefit schemes
• Guaranteed annuity rates (GAR's)
• Any deferred annuity rate
• Guaranteed basic annuity.

Pension Transfer Specialists

The advice of a Pension Transfer Specialist is now required for most pension transfers involving safeguarded benefits above the value of £30,000, regardless of when the transferred benefits are being crystallised. Areas requiring a Pension Transfer Specialist include:

• Transfer of Defined Benefits to Defined Contribution schemes
• Transfers of Occupational DC schemes, with safeguarded benefits, to personal pension or stakeholder pension schemes
• S32 transfers where the policy contains safeguarded benefits i.e. GMP
• Where a client is given advice to opt-out of an occupational pension scheme

This could lead to interesting scenarios where the value of a Guaranteed Annuity Rate is in excess of £30,000 but due to its loss on transfer or conversion it is lower than £30,000. It appears the intent in this case is that appropriate advice is required.

Transfer permissions but no Pension Transfer Specialist

There are two significant exceptions to the above requirements (both in terms of the requirement for a Pension Transfer Specialist and production of a TVAS).

Firstly, where the advice is on conversions or transfers in respect of pension policies with a guaranteed annuity rate (GAR). Although GARs are safeguarded benefits, the FCA has decided not to require these cases to undergo a TVAS or be checked by a Pension Transfer Specialist. As such advice can be provided by an adviser with investment advice permission, as long as their firm has the appropriate permission to conduct transfer business.

Secondly, pension transfers from occupational DC schemes, without any safeguarded benefits can now be transacted by an individual within a firm that has the transfer permissions without the need for that advice to be authorised by a pension transfer specialist.

The FCA define a pension conversion as a transaction resulting from a decision of a retail client to require the trustees or managers of a pension scheme to:

1. Convert safeguarded benefits into different benefits that are flexible benefits under that pension scheme; or
2. Pay an uncrystallised funds pension lump sum in respect of any of the safeguarded benefits.