Plans to change the way pension transfer values are calculated have been published for consultation today by the Financial Services Authority.
The regulator said the proposed changes would clarify and update the current standards and aim to ensure that pension scheme members considering a transfer are given a fair assessment of what they will receive in retirement.
Current FSA rules already set out how to calculate the benefits of a transfer that will be given up when a member of a defined benefit pension scheme transfers to a personal pension, using a transfer value analysis.
This involves a comparison between the benefits of the DB scheme and those that could be provided by the personal pension scheme. According to the FSA, the complexity of the TVA means the full facts should be presented to a scheme member before any action is taken. The starting point is always that a transfer is not in the client's best interests.
Through the changes proposed today, the FSA aims to ensure the assumptions used by advisers for the comparison are applied consistently by all firms, take account of recent legislation and use reasonable growth rates for illustrating the results of the TVA to the member.
In particular, it is proposing:
- to update the rules for calculating mortality to be aligned with those used by the Board for Actuarial Standards, and therefore making them consistent with annual pension statements that all personal pension holders receive once a year;
- to calculate annuities on a gender-equal mortality rate, in line with the European Court of Justice's decision in March 2011;
- to introduce a Consumer Price Index assumption for re-valuing pensions in deferment, reflecting legislative changes made by the government in 2011;
- to require CPI-linked benefits to be valued using the Retail Price Index linked annuity interest rate;
- that Limited Price Indexation annuities will be valued on the same assumptions as RPI-linked annuities; and
- that the comparison provided to the member is illustrated on growth rates that take into account the likely returns of the pension fund assets as well as the transfer of risk from the DB scheme to the member.
According to the regulator, these changes to the way TVAs are performed will prevent an undervaluation of benefits of up to £20bn by increasing transfer values before an adviser recommends a transfer.
Sheila Nicoll, the FSA's director of conduct policy, said the move by employers to reduce liabilities by offering DB scheme members a move to a personal pension made it 'vital' employees got a fair deal.
'As things stand, there is a high risk members receive unsuitable advice as a result of the mechanistic approach to analysing transfer values taken by some advisers. These changes are important to make sure that members' interests are at the centre of any decision to transfer and that any advice to transfer is suitable,'
"We have seen examples of advisory firms recommending a transfer when there is little or no justification to do so, or where the reasons given for an individual to transfer have nothing to do with their particular circumstances.
Ms Nicoll said that while not every transfer exercise was bad and some people could benefit from changing to a personal pension, 'they must all be treated fairly'.
The consultation is open until March 27.
John Harrison, partner at Barnett Waddingham, said the proposals were to be welcomed if they improved the advice that scheme members receive.
'In particular, updating the mortality tables used in the analysis and adopting unisex mortality rates will provide members with a better indication of benefits available in the marketplace,' he said.
'Nevertheless, employers will generally see a much bigger hurdle to clear if a transfer is to be in the best interests of members, which could require a significant increase in the amount of incentive needed for a man aged 45, the impact of the mortality change alone is to add around 10% to the overall cost, and other proposed changes could easily add a further 15%.
He added: 'At a time when many employers are struggling to fund their pension commitments, this could significantly dent employers' enthusiasm for such incentive exercises as a legitimate way of reducing their risk exposure.'