Pensions advice and due diligence

12 September 2017

Older software, including TVAS and pension switching tools, may soon be past their sell-by-date. The Consultation Process for ‘Advising on Pension Transfers’ is now underway with publication of Consultation paper CP17/16. Issues are coming to a head reflecting that annuity is no longer the default option and guaranteed income is not necessarily the end game.

There is a need for clear strategies tied to investmentand income objectives. This year Rory Percival has also warned that advising in this area may be ‘impossible without some kind of cashflow modelling’.

Most advisers will have noticed the upheavals in the pensions’ advice areas, and wondered what opportunities exist. Part of the disruption has come from the cessation of trading of various transfer specialists, the type that would check a critical yield calculation to allow an adviser recommendation to proceed. The regulator recognised that the process had been too compartmentalised and distorted by ‘contingent charging’ (incentivising the recommendation to switch, on which the fee was ‘contingent’). Focus had wandered too far from the client’s circumstances to a ‘tick box’ culture.

To fulfil changing due diligence requirements, advisers will need to combine retirement income modelling and drawdown analysis. The new world will rightly be dominated by advisers and their assessments of the broader objectives of clients. You may be able to replace some of the tools that have previously provided TVA calculations. The ‘Transfer Value Comparator’ will be stepping into these shoes. This is good news as use of investment ‘defaults’ and the ‘box ticking’ culture is baked into the shortcomings of these tools. Pensions advice now requires a more up-to-date template for advice, including accurate ‘enhanced’ annuity quotes: Example given in CP17/16: “The notional annuity purchase
is being used as a proxy to determine the value that might be gained or lost by giving up the safeguarded benefits. It could cost you £140,000 to obtain a comparable level of guaranteed income on the open market. This means the same retirement income could cost you £20,000 more by transferring.”.

The central proposition of the CP17/16 paper is that consumer protection requires pensions advice to be ‘a personal recommendation’. Due in part to recent high transfer valuations and the increasing precariousness of many schemes, a transfer is no longer deemed unsuitable by default, however removal of specific benefits are deemed to be unsuitable by default. So (3.10) ‘We propose to require all advice on the transfer and conversion of safeguarded benefits to include a personal recommendation’.

There is further clarification in use of software: ‘Adviser firms will be responsible for ensuring the APTA, including the TVC, is undertaken to a sufficient degree to support a suitable recommendation. Advice firms are liable for the
advice even where it is checked by a third party pension transfer specialist. Consequently, advisory firms must make sure that any software used meets their advice needs’.

The new breed of pensions research and suitability tools for advisers will include: a calculation of ‘Investment required for desired income’; a ‘maximum achievable income’ (from pensions in drawdown) and a ‘Maximum annuity income’ taken from live provider quotes (as per APTA requirements. It will also need to produce enhanced annuity quotes – essential given that 65% of retirees qualify for enhanced rates).

Original content: Financial Planning Today Magazine