What are the Basic Categories of Pension Benefit and Broadly What Types of Pensions Does Each Category Include?
Flexible Benefits
- Money Purchase Benefits
- Cash Benefits
- ‘Third Type’ Benefits
Safeguarded Benefits
- Any Benefits That Are Not Either: -
- Money Purchase Benefits, Or
- Cash Balance Benefits
What criterion must a member fulfil in order to have a statutory right to transfer their accrued pension benefits?
Under Pensions Act 1993
Flexible Benefits
- Can be transferred st any age providing the funds are uncrystallised.
Safeguarded Benefits
- Member must be more than 12 months from the scheme’s normal pension age (NPA). (Note that some scheme trustees may allow transfers within 12 months of the scheme’s NPA, although there’s no statutory obligation on them to allow this).
- Member must not have made a request in the preceding 12 months.
- Member must have either ceased accrual or be a deferred member.
- Member must make a formal application to transfer after receiving their statement of entitlement.
Explain the term ‘Appropriate Independent Advice’, when it’s required and by whom?
APPROPRIATE - Adviser and firm appropriately authorised and regulated.
INDEPENDENT - Not connected to the scheme or its trustees.
REQUIRED - Where the CETV, before any reduction for scheme underfunding, is > £30,000
CHECK - Trustees must check that the member has received a personal recommendation, that the advice is specific to the transaction that the member wishes to undertake, and the adviser / firms FCA reference number and authorisation to advise on the transfer of safeguarded Benefits. They must also check that it relates to the member and the name of the scheme from which he wants to transfer safeguarded benefits.
Specifically what evidence do the trustees require regarding the advice given to the member?
- The evidence must be in writing from the adviser to the member (copy sent to the trustees).
- The advice must be specific to the transaction.
- The advice must specify that the adviser and the firm hold the appropriate authorisations.
- The FCA Reference Number of the adviser/firm must be quoted.
- The name of the member and the scheme name must be quoted.
Outline the timeline for statutory transfers of over £30,000
T0 - Member applies for statement of entitlement.
T1M - Within 1 month trustees must inform member of need to seek financial advice.
T3M - Guarantee Date
T3M+10d - Within 10 days of the guarantee date trustees provide statement of entitlement and inform member of deadline for receiving confirmation of advice.
T6M - Deadline for member to apply for transfer in writing.
T6M+10d - Deadline for member to provide proof of independent advice.
T9M - within 6 months of guarantee date and having checked independent advice has been received by member and the receiving scheme is a legitimate arrangement, trustees make transfer.
Explain what is meant by the term ‘Personal Recommendation’
A recommendation that is advice on conversion or transfer of pension benefits and is presented as suitable for the person to whom it is made, or is based on a consideration of the circumstances of that person.
Outline the steps to be taken in determining suitability.
Starting assumption - the transfer will be unsuitable.
Then adviser should take account of the clients: -
- Intentions for accessing the pension benefits.
- Attitude to and understanding of the risks of exchanging safeguarded benefits for flexible benefits.
- Attitude to and understanding of investment risk.
- Realistic income needs including how they can be achieved, the role played by the safeguarded benefits in achieving them, and the impact on those needs of a transfer, including any trade offs.
- Alternative ways of achieving their objectives (other than the transfer of benefits).
State the key elements of the APTA (Appropriate Pension Transfer Analysis)
- Must be carried out before a personal recommendation is made.
- Rates of return must reflect the investment potential of the recommended assets.
- Use assumptions set out in COBS to illustrate income paid from ceding scheme at point of retirement.
- Can incorporate both behavioural and none financial analysis.
- Can incorporate a critical yield if a firm thinks this is a valid approach.
- Consider the impact of the transfer on the client’s tax position and their access to state benefits.
- Consider how the ceding scheme and the proposed scheme will meet the client’s income needs and provide required death benefits.
- Consider the likely pattern of benefits from the ceding scheme and the proposed scheme.
- Illustrate a reasonable period beyond standard life expectancy.
- Must take account of all charges including any charges that may occur whether or not the transfer takes place.
- Must include a TVC.
- Consider trade offs in a broader sense (e.g. guarantees vs flexibility).
Outline the main steps in the TVC calculation process.
- Revalue pension benefits at date of leaving to scheme pension age of ceding scheme.
- Calc the capital cost of purchasing an annuity based on scheme benefits.
- Discount the capital cost back to the date of calculation using Gilt returns.
- Calculate the difference between the discounted cost and the CETV being offered.
Describe the role of the Pension Transfer Specialist (PTS)?
From 1st April 2018a PTS must: -
- Check the entirety and completeness of the advice.
- Confirm that any personal recommendation is suitable for the client (based on COBS 9.2.1R & 9.2.3R around assessing suitability).
- Confirm in writing that they agree with the advice before it is provided to the client, including any personal recommendation.
What information must be communicated to an insistent client?
Where advice has been given but the client has decided they want to take a different course of action.
- That the firm has not recommended the transaction and it’s not in line with the firm’s personal recommendation.
- The reasons why the transaction will not be in line with the firm’s personal recommendation.
- The risks of the transaction proposed.
- The reasons why the firm did not recommend that transaction to the client.
What key information do you need from scheme trustees in order to prepare an analysis?
REGISTERED LAST
Revaluation rates Escalation rates GMP details I’ll health benefits Spouse and dependents benefits Transfer value Equalisation Rules and booklet Early retirement Discretionary increases
Lump sum death benefits
April 97 split
Surplus or solvency
Tax free cash
What are the main risk factors associated with decumulation?
PIG SCHITE
Partner or dependents
Impact on means tested benefits
Guarantees (loss of)
Sustainability of income Charges Health Investment scams Ever shopped around?
What Key documentation must be retained on file for compliance purposes?
- Client fact find
- DB Transfer questionnaire
- Disclosure documentation
- Statement of entitlement
- All docs making up the APTA inc: -
- TVC
- The ceding scheme information
- New plan research and illustrations
- Suitability report
- PTS agreement with advice
What assumptions must be used within the TVC calculation process?
- Annuity interest rate
- CPI
- RPI
- Average earnings
- Mortality rate (PMA08 or PFA08 or suitable alternatives)
- Product cost to 0.75%pa
- Purchase cost of the annuity (4%)
- Fixed coupon yield (UK Actuaries Index)
All factors which might influence a decision to transfer.
Health Longevity Need for income Need for PCLS Legislative changes Taxation Views on inflation ATR / TFL / Lisa of guarantees Other income Other assets Impact on means tested benefits Costs (initial, ongoing, reviews) Flexibility of death benefits Inheritance Scheme funding / PPF position Employer solvency Investment preferences CETV - enhancement or penalty Revaluation and escalation rates
What are the steps in calculating a CETV?
- Calc preserved pension At date of leaving
- Revalue to scheme’s NPA (GMP valued differently)
- Calc cost of equivalent LTA
- Discount cost to date of Calc
- Apply any reductions or increases based on solvency or enhancements
State the limitations of TVAS
Changes to assumptions have a major impact on critical yield
Based on client buying an annuity which is unlikely given pension freedoms
Flexibility of benefits can’t be built into a TVAS, limiting value of this alone being used as an indicator of whether to transfer
Not helpful for clients at or near retirement age
Not widely understood by consumers
State the principals of the Pensions Regulator code of practice for trustees engaged in an incentive exercise.
- No cash incentives contingent on acceptance of offer
- advice should be provided to the member for transfers
- For modification exercises, either advice should be provided or a value requirement should be complied with and IE guidance provided to the member
- Communications should be clear, fair, unbiased and straightforward
- Records should be retained for an audit trail
- No undue pressure and sufficient time given for member to make a decision
- Only offered to members over 80 on an opt in basis (vulnerable client policy)
- All involved should act in good faith in areas where they have direct control
Trustees key duties when offering an enhanced transfer value
- Understand extent of legal obligations
- Take advice where necessary
- Fully understand the incentive exercise and how it achieves the level of good practice recommended in the code
- Act fairly in relation to members
- Ensure members are properly informed
- Ensure sound internal controls
- Manage any conflict of interest
- Beware of data protection responsibilities
- Consider the funding impact
Issues which might prompt a review of an incentive exercise by the pensions regulator
- Selective offers to certain members
- An attempt to exploit the protection of the PPF
- Funding exercises which could affect an existing recovery plan
- Putting undue pressure on members to transfer or give up benefits
