Mock Questions

Question 1

Name the key elements that make up the information contained in a statement of entitlement.

Answer 1

1.  Name and reference number of the member
2.  Date of joining the scheme
3.  Date of leaving the scheme
4.  The guarantee date
5.  The transfer value amount
6.  The amount of the TV that is guaranteed
7.  The deferred benefits that the transfer value is based on
8.  The normal retirement age
9.  The Guaranteed Minimum Pension age
10.  Details of the deferred pension

Question 2

Explain, in detail, the 2 different bases used to assess the financial solvency of a DB scheme and the implications of a deficit.

Answer 2

1. Technical level

Based on the ongoing liabilities of the scheme (in other words benefits payable)

2. Solvency level

The total liability of the scheme assuming they had to pay all the benefits at once (the winding up cost)

The technical level is usually higher than the solvency level This is the figure that the trustees must publish

Both are usually expressed as a % of the fund’s total liabilities

Where a scheme is in deficit at a technical level They must have a recovery plan in place

Question 3

Outline the criteria that must be met for the Pension Protection Fund (PPF) to assume responsibility for a scheme.

Answer 3

An employer must suffer insolvency event and have no chance of being rescued.

There must be insufficient assets in the scheme to secure pension benefits on wind up that are at least equal to the compensation that the PPF would provide.

Question 4

Explain the meaning of the term ‘hurdle rate’ in the context of defined benefit pension transfer advice and how it is different from ‘critical yield’

Answer 4

The ‘hurdle rate’ is the annual investment return required after charges, to provide a capital sum sufficient to purchase a single life level annuity, with no guarantee period that matches the initial level of scheme pension payable from scheme normal pension age.

The ‘critical yield’ also includes the capital cost of future escalation for the pension in payment, dependant’s benefits and any guaranteed period.

Question 5

A financial adviser has recommended a pension transfer from a defined benefit scheme to a personal PP

State the main documentation the adviser would retain on file to demonstrate compliance with regulatory requirements for pension transfer advice

Answer 5

Fact find questionnaire.

Disclosure documentation.

Transfer Value Analysis System (TVAS) report.

Cash Equivalent Transfer Value (CETV) Statement of Entitlement.

Statement of pension entitlement and scheme information.

Personal pension research, illustration and key features documentation.

Suitability report.

Proof of pension transfer specialist sign off.

Question 6

Outline the criteria that must be met for the Pension Protection Fund (PPF) to assume responsibility for a scheme.

Answer 6

• An employer must suffer insolvency event and have no chance of being rescued.
• There must be insufficient assets in the scheme to secure pension benefits on wind up that are at least equal to the compensation that the PPF would provide

Question 7

Outline the protection that would be provided in respect of Sanjay’s benefits, assuming the scheme enters the PPF and Sanjay has taken his benefits at normal pension age.

Answer 7

• Sanjay would receive 100% of his pension income, however, the escalation would be restricted to CPI capped at 2.5% in relation to post 97 benefits only.
• There would be a spouse’s pension of a maximum of 50% of the member’s pension in payment.

Question 8

Arthur will reach age 65 in two months and has a retirement annuity policy valued at £120,000. The policy offers a guaranteed annuity rate of 8.5% but only on a single life basis, paid annually in arrears with no escalation. He is married to

Theresa and one of his objectives is to provide financial security for her in the event of his death.

(a) Outline the fact ors that should be considered by Arthur before transferring to a personal pension to access his pension benefits flexibly

Answer 8

• Arthur’s willingness and ability to give up guarantees a nd take investment risk.
• Health, lifestyle and life expectancy of Arthur and Theresa.
• Requirement for advice and the cost of advice.
• Target income v Guaranteed Annuity Rate (GAR) v open market annuity rates.
• Death benefits available.
• Other assets and pension arrangements.

Question 9

What is meant by ‘capacity for loss’?

Answer 9

The amount of risk that the client can take without their standard of living being affected.

Question 10

What is the potential outcome where trustee’s requirements are not met within the guarantee period?

Answer 10

They have the right to refuse to complete the transfer

Question 11

What does the FCA intend replacing TVA with?

Answer 11

An appropriate pension transfer analysis (APTA)

Question 12

What is a Guaranteed Minimum Pension (GMP)?

Answer 12

 Contracted-out benefits accrued before 6.4.97

 In return for reduced employer/employee NICs

 Trustees had to provide a minimum level of pension at least equivalent to the Additional State pension being given up

Question 13

What are the two methods available to trustees to revalue GMP?

Answer 13

Fixed-Rate a fixed rate dependent on date of leaving

and

Full-Rate revaluation revalued in line with Average Earning Index