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1

Specific rules for pension transfers, conversions and opt-outs are contained in ....

FCA COBS 19.1

2

Comparison must take place between the benefits likely to be paid from a defined benefits/safeguarded benefits AND the benefits available on transfer from a personal pension/flexible benefits scheme.


Some of the areas to be compared include...

“As per COBS 19.1.2, the comparison must:

1. ensure there is sufficient information for the client to make an informed decision;
2. draw the client’s attention to the factors that do and don’t support the firm’s advice;
3. be presented to the client in good time, and no later than when the key features document is provided.”


“however COBS 19.1.3 states that the comparison should:

1. take into account all of the client’s relevant circumstances;

2. examine the benefits and options available under the ceding scheme, and the effect of replacing them with the benefits and options available under the proposed scheme.

3. explain the assumptions on which the analysis is based and the rates of return required to match the benefits being given up;

4. use rates of return to illustrate potential benefits which take into account the likely expected returns of the assets in which the client’s funds will be invested;

5. make a comparison with the benefits available from crystallisation at normal retirement age under that scheme where an immediate crystallisation of benefits is sought prior to that age.”

“Where the ceding scheme is a defined benefit pension scheme the comparison must use assumptions as stipulated by COBS 19.1.4.”

“and include reference to the following:

1.The annuity interest rate.
2.The Retail Price Index (RPI).
3.Average earnings index and rate for S148 orders.
4.Annuity interest rate for post-retirement limited price indexation.
5.Mortality rates.
6. The Consumer Prices Index (CPI).

The analysis should also calculate the interest rate in deferment, and have regard to benefits which commence at different times.”






Excerpt From: Neil Dickey BSc (Hons) Chartered Financial Planner FPFS. “AF7: 2018-19 Study text.” The Chartered Insurance Institute, 2018-07. iBooks.
This material may be protected by copyright.

3

Regarding pension transfers, conversions and opt-outs, what are the rules regarding suitability?

“The rules regarding suitability are those applicable to any retail investment advice and are contained in COBS 9.2, and additional guidance is provided in COBS 19.1 for firms providing pension transfer advice”

“it is expected to include:

1. a summary of the advantages and disadvantages of the personal recommendation made;
2. an analysis of the financial implications if the recommendation is to opt out; and
3. a summary of any other material information.”

“Further guidance in COBS 19.1.6 states that when considering whether to transfer, convert or opt-out, a firm should start by assuming that a transfer, conversion or opt-out will not be suitable for the client. From here the firm should only consider a transfer where it can clearly demonstrate using contemporary evidence that a transfer, conversion or opt-out is in the client’s best interests.”



Excerpt From: Neil Dickey BSc (Hons) Chartered Financial Planner FPFS. “AF7: 2018-19 Study text.” The Chartered Insurance Institute, 2018-07. iBooks.
This material may be protected by copyright.

4

How should the advise firm handle the risk to the client of a defined/safeguarded benefit transfer?

“It is essential that the firm clearly informs the client about the benefits they will be giving up and the implications of the loss of these benefits. Specifically, this should include the:


1. The potential investment risk and annuity rate risk the client will be exposed to,
2. The potential lack of availability of annuity types to replicate the benefits being given up in the defined benefit pension.


The guidance also notes in COBS 19.1.7 that the rate of return required to replicate benefits being given up should not be considered as being sufficient in itself to ensure a personal recommendation is suitable.

“In other words, the suitability of the advice should be based on the client’s entire personal and financial circumstances

Where the advice is that the client should not proceed with a transfer, conversion or opt-out, this advice should also be given in writing (COBS 19.1.9).”



Excerpt From: Neil Dickey BSc (Hons) Chartered Financial Planner FPFS. “AF7: 2018-19 Study text.” The Chartered Insurance Institute, 2018-07. iBooks.
This material may be protected by copyright.

5

What is the 3 step process that a firm must follow should a retail client decide that they would like to take one of the actions specified in COBS 19.7.7R (I.e access their pension savings for purposes of pension decumulation) ?

1. Has the client received regulated guidance or advice?

2. What are the risk factors?

3. The retirement risk warnings are.... to be specific to the personal circumstances of the retail client.

6

What type of risks to the retail client does the regulator expect to be identified?


“The rules stress that firms should establish and justify their own specific risk factors. The list is as follows:

1. The client’s state of health.
2. Loss of any guarantees.
3. Whether the client has a partner or dependants.
4. Inflation.
5. Whether the client has shopped around.
6. Sustainability of income in retirement.
7. Tax implications.
8. Charges.
9. Impact of means-tested benefits.
10. Debt.
11. Investment scams.”

Excerpt From: Neil Dickey BSc (Hons) Chartered Financial Planner FPFS. “AF7: 2018-19 Study text.” The Chartered Insurance Institute, 2018-07. iBooks.
This material may be protected by copyright.

7

Please note HALF. PAST. NINE.

H = Health & Longevity
A = ATR/CFL
L = Legacy & Legislation (possible changes)
F = Funding of Scheme
P = PCLS from Scheme v PCLS from PP
A = cApital & income required in retirement
S = additional Sources of Income
T = Tax mitigation
N = NRD/SRA
I = Inflation expectations
N = aNy other case specific points.
E = Expenditure. Charges. Cost. Complexity. Critical Yield

8

How long are firms required to retain client records on pension transfers, conversions, opt-outs or FSAVC advice?

Indefinitely

9

What is an advice firm expected to do with insistent clients?

“In May 2016 the FCA published a factsheet entitled ‘Pension reforms and insistent clients’, which outlined a three-step process for firms to adopt when advising an insistent client:”

1. Provide advice that is suitable to the client inline with the normal advice process.

2. Make clear the risks of the alternative course of action.

3. Make clear that their actions are against the firm's advice.

“The guidance came into effect on 3 January 2018, and it is important to note that under these rules it remains the responsibility of the firm to determine how (and if) they should proceed with clients who don’t take the advice given.”





“Under COBS 19.1.7, if a firm arranges a pension transfer or pension opt-out for a client without making a personal recommendation it must make a clear record of the fact that no personal recommendation was given to that client; and retain this record indefinitely.”

10

please note Permissions:

“Advising on conversion or transfer of pension benefits
Under article 53E of the Regulated Activities Order giving advice to a person (‘P’) who has subsisting rights in respect of any safeguarded benefits in their capacity as:
1. a member of a pension scheme; or
2. a survivor of a member of a pension scheme;

is a regulated activity if the advice is on the merits of P requiring the trustee or manager of the pension scheme to carry out any of the transactions listed in the FCAPerimeter Guidance Manual (PERG).

The transactions in PERG 2.7.16FG are:

1. converting any of the safeguarded benefits into different benefits that are flexible benefits under the scheme; or
2. making a transfer payment in respect of any of the safeguarded benefits with a view to acquiring a right or entitlement to flexible benefits for P under another pension scheme; or
3. paying a lump sum that would be an uncrystallised funds pension lump sum in respect of any of the safeguarded benefits.”

Excerpt From: Neil Dickey BSc (Hons) Chartered Financial Planner FPFS. “AF7: 2018-19 Study text.” The Chartered Insurance Institute, 2018-07. iBooks.
This material may be protected by copyright.

11

Regarding the suitability of pension transfer advice, the pension transfer specialist should...



1. review the proposed scheme and investment relative to both the client’s attitude to transfer risk and their attitude to investment risk;

2. ensure that the potential returns and all relevant charges for the proposed scheme and investments, have been appropriately taken into account in the APTA; and

3. consider whether there are alternative solutions that could meet the client’s needs and objectives, either with less risk or without giving up the safeguarded benefit.”

Excerpt From: Neil Dickey BSc (Hons) Chartered Financial Planner FPFS. “AF7: 2018-19 Study text.” The Chartered Insurance Institute, 2018-07. iBooks.
This material may be protected by copyright.

12

Be Aware:

“Be aware:
Flexible benefits are defined as money purchase benefits that can access pension flexibilities as defined within the Taxation of Pensions Act 2014.


Safeguarded benefits are defined as benefits that are not money purchase or cash balance benefits. They include defined benefits, guaranteed pensions including guaranteed minimum pensions (GMPs) and guaranteed annuity rates (GARs).”

Excerpt From: Neil Dickey BSc (Hons) Chartered Financial Planner FPFS. “AF7: 2018-19 Study text.” The Chartered Insurance Institute, 2018-07. iBooks.
This material may be protected by copyright.

13

Please note:


“The introduction of the pension freedom reforms in the Pension Schemes Act 2015 redefined the provision of pension transfer advice and amended the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 to include a specific regulated activity requiring a member or their survivor to obtain appropriate independent advice where the total value of the member’s or survivor’s subsisting rights in respect of safeguarded benefits under the pension scheme exceeds £30,000 on the valuation date.”

Excerpt From: Neil Dickey BSc (Hons) Chartered Financial Planner FPFS. “AF7: 2018-19 Study text.” The Chartered Insurance Institute, 2018-07. iBooks.
This material may be protected by copyright.

14

What does the statutory right to transfer from The Pensions Scheme Act 1993 involve?

“A member has a statutory right to transfer safeguarded benefits on the basis that they meet the following criteria:
1. They have ceased to accrue benefits.
2. An application to transfer those benefits is made following receipt of the statement of entitlement.
3. The application to transfer is made one year or more before the scheme’s normal pension age.”

It applies to

Money Purchase, Defined Benefit and Hybrid schemes.

“In general, the statutory right to transfer only applies where a member transfers the whole of each category of benefit. There is an exception to this, however, where the member has contracted-out rights such as guaranteed minimum pension (GMP) and is transferring to an occupational pension scheme that was not formally contracted-out or personal pension. These schemes may not be able or willing to accept the GMP liability; in this scenario the statutory right would be to transfer only the excess benefits over the GMP, or the non-GMP pension accrued prior to 6 April 1997.”


15

Please Note the TPR:

“The Pensions Regulator (TPR) regulates UK work-based pension schemes under the remit of the Department for Work and Pensions (DWP). Its main purpose is to ensure that pension schemes are adequately funded and operated in the best interests of its members, and that employers meet their obligations to enrol staff into a pension scheme and pay contributions.”

“Be aware
The Pensions Regulator’s principal focus is to protect the interests of members of work-based pension schemes. It provides rules and guidance for employers, trustees and scheme administrators.”

“TPR is currently funded via two grant-in-aid payments from the DWP. Some operating costs and those of other bodies such as the Pensions Ombudsman are recovered from eligible pension schemes through a levy. The rate of levy is reviewed and set each year by the Secretary of State for Work and Pensions.”



16

What is the role of Trustees in a pension transfer, conversion?

“They are also required to keep records of all transfer requests received and details of all transfers made. In terms of the transfer process trustees are required to:

1. provide a statement of entitlement within three months of a member request, and once in every twelve-month period;
2. decide the basis upon which the transfer value will be calculated.
3. decide whether the initial cash equivalent (ICE) should be decreased or enhanced;
4. issue communications to the member in line with the statutory process.
5. advise the member whether or not there is a requirement for them to receive appropriate independent advice;
6. check that appropriate independent advice has been received, and that the adviser providing the advice is appropriately authorised and regulated;
7. process the transfer in line with statutory requirements;
8. check that the receiving scheme is able/willing to accept the transfer; and
9. pay the transfer amount to the receiving scheme within six months of the guarantee date.”


17

What are the 2 methods of calculating CETVs?

“The basis for calculating transfer values is confirmed in legislation in The Occupational Pension Schemes (Transfer Values) (Amendment) Regulations 2008. The legislation provides for two methods for calculating CETVs:

1. the best estimate method – based on the expected cost of providing the members benefits in the scheme; and
2. the alternative method – where trustees wish to pay CETVs above the minimum amount.”

18

What is the Best Estimate Method of calculating CETV values?

“It is the trustees’ obligation, assisted by the scheme actuary, to decide what assumptions should be used to calculate the ICE. The resultant ICE should be a best estimate of the amount of money needed at the date of calculation to provide the scheme benefits if invested by the scheme.”

Excerpt From: Neil Dickey BSc (Hons) Chartered Financial Planner FPFS. “AF7: 2018-19 Study text.” The Chartered Insurance Institute, 2018-07. iBooks.
This material may be protected by copyright.

19

What does the Alternative method involve and how does it differ from the best estimate method?

“The best estimate method provides for the calculation of the minimum transfer value, whereas the alternative method provides the basis for paying CETVs at a higher amount.”

20

Be aware:

“Reducing transfer values
The trustees are allowed to offer transfer values less than the ICE calculated on the best estimate basis in certain circumstances:

1. To allow for underfunding in the scheme – only after an insufficiency report has been obtained.
2. To allow for wind-up expenses.
3. Priority order allowance – to retain parity in benefit security between those transferring and those remaining in the scheme.”

21

What are the details for the Statutory process of DB Pension Transfer?


1. Member applies for Statement of Entitlement.

2. 1 MONTH: Within 1 month Trustees inform member of need to seek Financial Advice.

3. 3 MONTHS: Guarantee Date.

4. 3 MONTHS + 10 Days: Within 10 days of Guarantee Date, Trustees provide Statement of Entitlement and Inform member of deadline for receiving confirmation of advice.

5. 6 MONTHS: Deadline for member to apply for transfer in writing.

6. 6 MONTHS + 10 Days: Deadline for member to provide proof of independent advice.

7. 9 MONTHS: Trustees make transfer within 6 months of Guarantee Date and having checked that Independent advice has been received by the member.