TVC = Transfer Value Confusion
Jason Wykes, Managing Director at O&M Pension Solutions explains some of the uncertainties around the TVC calculation to be used in defined benefit (DB) pension transfer advice.
It has now been three weeks since advisers have had to start including a Transfer Value Comparator (TVC) when advising on a DB pension transfer.
The FCA stated in their consultation last year (CP17/16) that consumers did not understand the value of the benefits being given up from a defined benefit pension scheme and felt the TVC was a more graphical “in your face” approach to highlighting this.
It is meant to be a very prescribed calculation with the stated expectation that whatever pension transfer analysis system the adviser used, the TVC would produce a consistent figure.
As a firm who have been involved in pension transfer analysis software since 1992, we knew that was a very unlikely outcome. Different software copes to different degrees with being able to model the wide variety of defined benefit pension schemes.
However, you would assume a good starting point would be to have clear parameters and assumptions to use in the TVC calculation, laid out within the rulebook. Alas, that has not happened, and it is primarily due to the way it has been implemented by the FCA. Those of you who followed the consultation process will know the entire premise of the TVC (along with the assumptions used) changed considerably from the initial consultation paper to the final policy statement (PS18/X) issued in March this year.
Whatever you or I think of the TVC, it is here to stay so we need to focus on implementing the new rules. So, what are the problems? There are several, but I will focus on four today.
- TVC required when a member has already attained Normal Retirement Age?
Prior to the introduction of the TVC, it was clear that a TVAS was NOT required when a member had already attained the scheme’s Normal Retirement Age (NRA) and was retiring immediately. Instead, the adviser would follow the process for a member considering a transfer within one year of NRA. Namely, obtain the current scheme pension and the level of annuity that could be purchased, based upon the client’s circumstances (e.g. spouse, health, etc), and compare the two together. It may be that you were offered £10k per year in the scheme, which would cost £350k to purchase an annuity on the open market, whereas the transfer value being offered is only £250k.
COBS 19 Annex 4B lays out when a TVC is required:
1R covers “...retail client has 12 months or more before reaching normal retirement age…”
2R covers “…retail client has less than 12 months before reaching normal retirement age…”
COBS 19 Annex 4B does NOT cover a scenario where “…retail client has passed normal retirement age…”
However, we have been informed by some customers that the FCA has stated that a TVC would be required in such circumstances.
What is the proposal where a scheme does not actually allow late retirement? Instead, when the member asks for their scheme pension, the actuary assumes the member retired at NRA and works out the various back payments due.
- Spouse’s Pension
The policy statement clearly states that the TVC should include the value of a spouse’s pension, regardless of the member’s current or future marital status. However, nowhere in the FCA rulebook (COBS 19) does it tell you to include the value of the spouse’s pension in the TVC calculation! The closest is reference within the notes to show on the TVC printout which states “… that income (including spouse’s benefits) …”.
In addition, when calculating pension annuities, COBS 13 states to use the spouse’s gender and year of birth if known, but FCA have written to a few advisers and software companies stating that for the TVC you should always assume that a female is three years younger. Presumably, we are to assume the spouse is the opposite gender to the member?
- Discount Rate
The discount rate is detailed in FCA Conduct of Business Sourcebook (COBS) 19 Annex 4C 2R(2) and states “…must be based on the fixed coupon yield on the UK FTSE Actuaries Indices for the appropriate term.” That might sound clear, but it is not. Questions include:
- What date do you obtain the fixed coupon yields?
- Which of the various fixed coupon yields should you use? (for example, 0-5 years or 0-10 years for a term of 3 years?)
- How do you apply the 0.75% assumed product charge?
All the above will impact on the resultant figure, but the rules are silent on these points.
- Misleading note
Finally, the notes on the TVC printout were clearly not updated between the consultation and the policy statement. It currently states:
“2. The estimated replacement value takes into account investment returns after any product charges that you might be expected to pay.”
This is completely inaccurate as investment returns being assumed are “no risk” gilt rates and the product charges are generic and not what that client might be expected to pay. I would suggest a better text would be
“2. The estimated replacement value assumes a low “no risk” investment return of X% per annum and assumed product charges of 0.75% per annum.”
The problem is that the FCA massively changed how the TVC calculation was designed between the consultation paper and the final policy statement. Whilst the consultation paper included a draft of the proposed COBS rules, no one was able to comment on the final COBS rules implemented in the policy statement, despite the complete change in basis.
Surely, in such a high-profile advice area, where the FCA wish the TVC to be a very prescribed calculation, the least we could hope for would be some clarity on the rules. We can only hope that the FCA will promptly address these issues and publish revised rules and maybe actually ask people such as ourselves to comment on the rules and to highlight any issues before they publish.
This article was originally published on MoneyMarketing.co.uk on the 7th of November 2018.
O&M Pension Solutions