The current value and the important protections of low risk DB pensions must be fully and fairly valued and communicated to prospective transferees. Advice should be holistic and weigh the merits of all options available, rather than narrowly focused on a DB transfer.
London, 21st September – EValue, leading technology provider to the financial services industry, has responded to the FCA’s Consultation Paper on pension transfers – read here.
- EValue agrees that pensions freedom offers some highly attractive flexibility which many DB members may wish to access and that advice on transfers must be looked at in the context of the member’s personal circumstances and objectives, not simply on the transfer value.
- Proposed TVC calculations are a step forward but the assumptions used should ensure that the full potential loss in the value of pension benefits on transfer are clear to DB members.
- Robust technology can support advisers when helping consumers understand all options available to them, weighing the advantages and disadvantages of each.
The introduction of pensions freedom, together with the current high level of transfer values, has increased the focus on pension transfers. The FCA consultation is timely and welcome. People need to know in very clear terms the value of benefits they will receive under any defined pension plan they are in and what they might lose on transfer. Equally some, especially at or nearing retirement, may be more interested in the flexibility and alternative options under pensions freedom than the financial comparison. To provide advice in this area, it will be vital that a rounded and holistic approach to advice is taken, so that it is not simply focused on the financial merits or otherwise of the transfer. Instead, there needs to be an assessment and prioritisation of broader needs of any client receiving advice and importantly, including the alternatives to transferring.
When assessing the implications of transferring a DB pension, forecasting the income needs of the individual and how these will be met, is of significant consideration. It is vital that the model used by advisors to generate forecasts is robust. EValue believes that an economic scenario generator (ESG), capable of producing reliable simulations of future possible investment returns and economic conditions, can best meet these requirements. In particular, only an ESG can show the risk of “pound cost ravaging” i.e. a sequence of poor returns in the early years of income drawdown.
While the new Transfer Value Comparator (TVC) is an improvement on the current Transfer Value Analysis (TVA), EValue believes that there are still shortcomings that must be addressed to avoid a systematic undervaluation of safeguarded DB benefits, to the detriment of consumers. As such, EValue have proposed the following revisions:
- The use of a “risk free” market discount rate, based on a suitable government bond at the time of analysis.
- To ensure as accurate an assessment of value of the benefits to be foregone as possible, for members over age 55, the DB pension should be valued based on the income that would be received if retirement took place immediately, not on what might be received at Normal Retirement.
- The TVC should compare the transfer value with the amount required to buy the same guaranteed income on the open market.
Bruce Moss, Founder of EValue commented:
“We welcome the opportunity to respond to the FCA consultation and are anxious to ensure the calculations proposed to value DB benefits use assumptions to fully reflect the value that the investment market places on the DB benefits being given up. Members may well place less value on their DB pensions because of the lack of flexibility but they should, at the very least be given a clear financial comparison between their DB benefits and the transfer value being offered.”
Paul McNamara, Chief Executive of EValue added:
“Beyond the specific analysis and valuation of DB pensions, when any transfer is considered it is highly desirable that the broad and holistic advice is offered to consumers on the wide range of options available to them, including alternative ways to achieve their immediate and future goals.”