CP19/25 - Our View on the Proposed TVC Changes
The recently released Consultation Paper CP19/25 is the latest addition to the FCA’s drive to improve the standard of pension transfer advice provided to consumers.
Specifically, this new paper addresses the FCA’s proposal to ban contingent charging for all clients, except for members where specific circumstances mean a transfer is likely to be in their best interests. It does however cover several other areas of concern, one of those being certain aspects of the Transfer Value Comparator (TVC). We will focus on the TVC proposals within this brief commentary.
Within this consultation the FCA are suggesting an update to the methodology used to produce the TVC, with several areas they have identified that require attention:
Reduced product charge assumption: The pre-retirement expense assumption is being reduced from 0.75% to 0.4% to more closely reflect the charges associated with a product invested in gilts. As the product charge will be lower, the gap between the Cash Equivalent Transfer Value (CETV) and the TVC will be smaller.
Members within 12 months of NRA: Where there is less than 12 months to Normal Retirement Age, the requirement to obtain and use an open market annuity rate will be removed. The basis will be the same as that currently used for where there is more than 12 months to retirement. This will remove the element of personalisation (eg entering a post code) that is often factored in when obtaining open market annuity rates.
Members over NRA: Where a member has already passed NRA, it is proposed that a TVC will be required based on the retirement age used in the CETV calculation. It will therefore be necessary to check with the scheme which retirement age has been used, usually immediate retirement.
Late retirement for members under NRA: Where late retirement is being considered and the member has not yet reached NRA, the TVC should still be based on NRA but the APTA should illustrate late retirement benefits.
Rate of return changes: The pre-retirement rate of return basis has been clarified so that the 5 - 15 year index can be disregarded and the 5 - 10 and 10 - 15 year indexes should be used. The term should be based on the member’s NRA and the date at which the TVC is first prepared. The notes on the TVC may also be updated to state that the assumed rate of return is risk free.
Marital status: If the scheme rules provide a spouse/partner’s pension the TVC must now be based on the assumption that the member has an opposite sex partner, with the female being 3 years younger. If the partner’s gender and/or age is different to these assumptions this should be covered in the APTA.
Early retirement without reduction: If the scheme allows the member to retire early with no reduction to any of their benefits, and no consent is required from the Trustees and/or Employer, the TVC should be based on the earliest age unreduced benefits are available rather than NRA. This is likely to be consistent with how the CETV has been calculated. If the member has already passed this earlier unreduced age, the TVC should be based on immediate retirement. It is important to stress that if Trustee and/or Employer consent is required to retire at this earlier age, the TVC should still be based on the Scheme NRA.
In general, the proposed changes add clarity and consistency to the methodology used to produce a TVC.
More specifically, the proposals clarify that a TVC should be produced if the member has already passed NRA. The latter has been a contentious issue with our clients since October 2018, and we have previously provided guidance for their consideration. It is good to see some certainty added to this area. That said, we think that more thought needs to go towards the annuity rate basis that should be used in this scenario or where there is less than 12 months to go to Normal Retirement Age. Perhaps current market rates should still be used but on a more specific non-personalised basis (eg use a standard ‘typical’ post code for all quotes).
Of all the changes, one that appears to be beneficial for the member and adviser will be the proposal to allow a TVC to be produced using a retirement age other than NRA, where a member can take early retirement unreduced. This will allow the adviser to provide their client with a TVC that accurately reflects their unreduced retirement age, whereas previously they needed to produce the TVC to NRA. This is straightforward if there is no GMP, or the earlier unreduced age is GMP age or later.
Where the scheme permits early retirement with no actuarial reduction at an age prior to GMP age, some members with GMP will be granted a considerably lower pension from GMP age if they take early retirement than they would receive had they retired at NRA.
This is due both to the anti-franking legislation which allows full franking of excess pension where the member retires early, but only permits franking of increases in payment if retirement is at NRA, and also because pensions (particularly GMP) often grow in deferment quicker than they escalate in payment.
We will need to understand what the scheme does at GMP age in these circumstances, as the impact on the value of the member’s benefits could be significant. We think that more thought is required as to when, or whether, the TVC should be shown on unreduced early retirement.
ISSUE TO CONSIDER?
One issue that is not addressed within this Consultation Paper is the practice of providing further alternative TVCs to cover client specific circumstances, ie reports that use personalised data. We have been made aware that these are being produced, however we are unsure as to how widespread their use is or whether they are being included within an adviser’s APTA.
It is our understanding that there should only ever be one TVC included within the APTA and that this should be on the statutory basis set out by the FCA, using their specific format and wording. The provision of alternative comparisons that look similar to the statutory TVC should be discouraged to avoid confusion. For these reasons, we do not allow the production of a personalised TVC via our Transfer Bureau service and our Transvas Profiler software. We would expect this to be a consideration for adviser firms when they are selecting a TVC production service or software.
At the outset, the FCA stipulated that the TVC should not be personalised, therefore should we expect a reiteration of this either now or in the near future to ensure all advisers stay on track?
OUR RESPONSE & GUARANTEE TO YOU
In response to the FCA's request for feedback on the content of CP19/25 we have provided them with our observations and suggestions, particularly regarding the proposed TVC changes. You can view a copy of our response by clicking HERE.
We will be monitoring the situation closely and will ensure that, once this consultation has been finalised, any changes required to our software and services will be implemented without delay.
O&M Pension Solutions