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PS18/6 – Advising on Pension Transfers

Author Image Mark Devlin Technical Manager
19 minutes read
Last updated on 29th Mar 2018


The FCA have issued a policy statement with final rules and guidance to improve the quality of pension transfer advice. This is a summary of the proposals included within PS 18/6.

On 26 March 2018 the FCA published Policy Statement 18/6 – “Advising on Pension Transfers” in response to Consultation Paper 17/16.

Below is a summary of the paper, what was proposed and what this could mean. Full details can be found at

Requirement for a personal recommendation

The Proposal

Following on from FAMR, a proposed change in the recent Treasury consultation aims to give firms more confidence to help consumers, without actually providing a personal recommendation.

However, this proposal specifically relates to clients with relatively simple needs. But we know that giving advice on the conversion and transfer of safeguarded benefits cannot be defined as “relatively simple”. Furthermore, it is defined as a separate specified activity in legislation.

The FCA asked for agreement (that this area of advice) should always require a personal recommendation.

The outcome

They got agreement in the vast majority of cases and as such they are proceeding with this proposal.

This will be in effect from 01 April 2018.

What this could mean

All  advice on safeguards will now require a personal recommendation, presumably a higher bar than some current practices?

Starting Position for Assessing Suitability

The Proposal

The regulator had sought responses on replacing the current wording in the FCA handbook to state that retaining safeguarded benefits is likely to be in the clients best interests.  Perceived as moving to a more neutral starting point.

Reading between the lines, the starting position was still that a transfer is unlikely to be in a client’s best interests.

In CP17/16 they elaborated on what is required to formulate suitable advice, as listed below;

  • the client’s income needs and expectations and how these can be achieved, the role safeguarded benefits play in providing this income and the impact and risk if a conversion or transfer is made
  • the specific receiving scheme being recommended following the transfer and the investments being recommended within that scheme to ensure that it is appropriate for the risk profile of the client
  • the way in which the funds will be accessed, either immediately or in the future, including follow-on arrangements
  • alternative ways of achieving the client’s objectives. For example, there may be ways for a client to provide death benefits which can be funded from income rather than by a lump sum funded by a pension transfer, and which does not carry so much risk
  • the relevant wider circumstances of the individual

The FCA weren’t proposing to list examples of ‘relevant wider circumstances’, as these are dependent on the individual. However, they were to include tax issues, death benefits, interaction with means tested benefits, state of health, family situation and other sources of retirement income as being relevant.

The outcome

Whilst the FCA had broad agreement for the above plans they have decided not to take this proposal further. In Consultation Paper 18/7 they are opening a discussion on charging structures and feel that these are linked, as they are of the belief that the existing starting assumption counters the incentive to give unsuitable advice created by contingent charging.

Further to this, they are not proposing to expand  the guidance on “wider circumstances” it is actually removing this from COBS and replacing it with relevant factors to consider  in COBS 9.2.  Their view is it’s the firms responsibility to obtain the necessary information about the client to make a suitable recommendation.  If a firm cannot obtain the necessary information to assess suitability, for example, income needs in retirement for a younger client, advisers must not make a personal recommendation under COBS 9.2.6R.

They have also clarified that taking a partial transfer can fall under the definition of alternative ways to achieve a client’s objectives and should be asked about

It should be noted the high bar on suitability also applies to the giving up of GARs. 

All of the above needs to be considered, along with the staring position.

This will be in effect from 01 April 2018.

What this could mean

Arguably this should not make a difference to advice in this area. It’s the end result that counts, and if the file (and supporting evidence) is suitable then there is no issue. If the file isn’t suitable, then it will ultimately be judged as so.

It’s perhaps a bit disappointing that the additional guidance on wider circumstances is being removed, but ultimately for any advice the wider relevant circumstances of the client should be in the fact finding process as it is anyway.

Although it is perhaps a bit ageist (or confusing at least) to say that a younger client could not supply information on income requirements. In any event, if this is so, a suitably robust method of collecting sufficient income an expenditure information will be required or no recommendation can be made.

The Role of the PTS

The Proposal

Whilst only a PTS can give or check advice on pension transfers, the FCA are aware that in some cases the checking process is restricted to the numerical analysis, which is not in line with their expectations.

In essence how can a PTS know if a transfer is suitable merely by looking at the numbers? How can a PTS recognise a good outcome if they are unaware of the full customer circumstances including details of the receiving scheme and investment? In short they have to know that the overall recommendation is reasonable and not unsuitable.

The outcome

This was generally welcomed by respondents, there were a few queries on what reasonable actually means, and what would happen if a PTS disagreed with the recommendation.

They are proceeding with the proposals but removing the references to ‘reasonableness’. The final Handbook text reflects that they expect a PTS to:

  • check the entirety of the advice process, not just the numerical analysis, and consider whether the advice is sufficiently complete
  • confirm that the personal recommendation is suitable
  • inform the firm in writing that they agree with the advice, including any recommendation, before the report is given to the client

This means that any disagreements between the PTS and the adviser must be settled before the client is given the suitability report.

This will be in effect from 01 April 2018.

What this could mean

Creating clarity that suitability is not just a mathematical equation and ensuring that there is a check on the overall suitability can only be a good outcome for the clients receiving transfer advice. A check on numbers may be scientific, but advice is part art too, how do you factor in capacity for loss with investment risk? Can you determine that the transfer cannot proceed if you don’t know the clients planned expenditure and possible inheritances. It could also perhaps stop transfers solely into an “exotic”/unregulated investment.

The Qualification of the PTS

The Proposal

In CP17/16 the FCA stated that they wanted to ensure that not only are PTS advisers suitably qualified, they also have relevant experience. A simplistic analogy I like to use is that you can learn how to pass your driving test, but it takes experience to really learn how to drive.

The FCA also stated that they intended to update the appropriate examination standards that are set of PTS qualifications.

The outcome

In the responses it was noted that a number of respondents considered that PTSs’ knowledge was often inadequate or out of date. To carry on with my driving test analogy, I passed my test long before hazard perception and theory tests, so my driving knowledge is probably outdated.

There were also comments on the lack of specific CPD for PTS to maintain competence.

The last key area of the response was that there are currently difficulties in identifying a PTS on the FCA register, and that proposed changes to this would make finding out the qualifications even harder.

However, the qualifications for PTS has now been deferred onward to Consultation Paper 18/7, the issues with identifying PTS will be dealt with in a policy statement in the summer.

What this could mean

To give advice, I don’t think that many could argue that your knowledge remains up to date, having clarity on how this is evidenced will be a good thing. The T&C sourcebook currently requires this for all staff anyway. But we will have to await the consultation response.

Appropriate Pension Transfer Analysis (APTA)

The Proposal

In CP17/16 there was a proposal for advisers to undertake an APTA, which is personalised for each customer’s needs and objectives and would set out the minimum level of analysis expected for income and death benefits. It was also proposed that this would detail any “trade-offs” that have to be made for objectives against needs. Part of this process will be the inclusion of a prescribed comparator (covered next) providing a financial indication of the value of benefits being given up.

The proposal set out what would be expected for the appropriate analysis to include, as a minimum:

  • an assessment of the client’s outgoings and therefore potential income needs throughout  retirement
  • the role of the ceding and receiving scheme in meeting those income needs, in addition to any other means available to the client – effectively obtaining an understanding of the client’s potential cash flows
  • consideration of death benefits on a fair basis, for example where the death benefit in the receiving scheme will take the form of a lump sum, then the death benefits in the ceding scheme should also be assessed on a capitalised basis, and both should take account of expected differences over time

The outcome

In the responses this again was generally accepted as a step away from often confusing TVAS analysis. Some were concerned that having a minimum would be all that would be done (surely this is the definition of a minimum?). Some were concerned that this could be a box ticking exercise and could lead to increased charges passed on to the client.

However, the APTA will come into effect from 01/10/2018. The regulator has left this mostly at the discretion of the adviser (bar the TVC) as to how this should look and what should be incorporated . Advisers will be best placed to assess the needs and circumstances of their individual clients.  

In terms of contents this can include 

  • both behavioural and non-financial analysis, as well as considering alternative ways of achieving client objectives
  • Use of modelling tools, however, advisers should consider the part these tools play in explaining the options to individual clients.
  • Death benefit comparison
  • Overseas transfer comparisons

The APTA could also be used for self-invested clients, although there is further consultation required on this in Consultation Paper 18/7.

There will also be the following changes to the Handbook text that were consulted on:

  • a new rule requiring advisers to consider the impact of tax and access to state benefits, particularly where there would be a financial impact from crossing a tax threshold/band
  • a new rule to clarify that the APTA must consider a reasonable period beyond average life expectancy, particularly where a longer period would better demonstrate the risk of the funds running out
  • a revised rule requiring advisers to consider trade-offs more broadly and not just income v death benefits
  • new guidance on considering the safety nets – the PPF and Financial Services Compensation Scheme (FSCS) in the UK – that cover both the current and receiving schemes in a balanced and objective way
  • new guidance that if information is provided on scheme funding or employer covenants, it should be balanced and objective

This will be in effect from 01 October 2018.

What this could mean

From reading the consultation paper and the response this appears to clarify the regulators views on what is a suitable analysis to be given to clients. Having this detailed in the handbook can only be a good thing. Whilst this comes into force in October 2018, it may be worth ensuring that your current process takes this into account. Given the clear steer in last year’s consultation paper most would have been well advised to be doing this already.

The Transfer Value Comparator

We proposed that a mandatory Transfer Value Comparator (TVC) should be included within the APTA. This would replace the existing Transfer Value Analysis (TVA) approach, which focuses on the ‘critical yield’ needed to match a guaranteed income. The TVC would show, in graphical form as detailed below

Will I be better or worse off by transferring?

  • We are required by the Financial Conduct Authority to provide an indication of what it might cost to replace your scheme benefits.
  • We have done this by looking at the amount you might need to buy the same benefits from an insurer.

It could cost you £140,000 to obtain a comparable level of income from an insurer.

This means the same retirement income could cost you £20,000 more by transferring.

Image to follow 

The outcome

The majority of responses supported this as a starting point for demonstrating the value if the DB income as a capital sum, it was felt that clients would understand this better. However, in the original proposal there was to be a personalised rate of investment return used, this could leave the system open to “gaming”.  As well as this, consumer testing was suggested to ensure that the TVC would achieve its aim, as this concept was developed for the proposed sale of annuities post pension freedoms.

But not all respondents were in favour of this approach, as it is ultimately based on an annuity purchase,  which is not necessarily as relevant in a post freedoms world.

The FCA will proceed with this and like the APTA this will come into effect from 01/10/2018. It is worth noting that the rate of return will no longer be based on the clients likely investment performance. Instead this will be based on a “risk free” return from gilts to match the “risk free” nature of the DB income. Firms should also assume product charges of 0.75% and a 4% annuity rate on purchase.

This will be in effect from 01 October 2018.

What this could mean

The TVC certainly takes away the complication of explaining critical yield and the multitude of assumptions needed to give clients the value of the benefits they are giving up on a “no risk” basis. But introduces the potential for queries on the difference between the CETV value and the TVC value.

Whilst again this is based on annuity purchase, and this was criticised are we just really on the place we’ve always been.  Whether a critical yield or a replacement cost, putting the analysis into context around the clients objectives and wider circumstances is what is crucial. 

Ensuring that the remainder of the APTA puts clients in a suitably informed position around the risk they will be taking on and what that could provide in retirement will be crucial.  As it always has been it just wasn’t called an APTA.


The Proposal

When undertaking an ATPA or preparing a TVC, the FCA proposed that firms need to make financial and demographic assumptions to project potential future benefits from the current and receiving schemes. They proposed:

  • Changing the rolling annuity interest rate which is averaged over 12 months to an annuity interest rate based on a single recent monthly yield.
  • Providing guidance on appropriate published population statistics which allow for future mortality improvements, such as those from the Office for National Statistics.(Firms could adopt separate assumptions for women and men.)
  • That any projections of future benefits for the APTA (including the TVC) should be based on a rate of growth, including an allowance for any lifestyling if appropriate for the client’s personal circumstances, including their attitude to risk.
  • Providing guidance that these rates should be no higher than the intermediate rate of growth shown on a corresponding Key Features Illustration (KFI) for the receiving scheme.
  • Adding explicit requirements on the charges to be included in an APTA (including the TVC). These will include relevant product, platform and adviser charges. There should also be an assumed allowance of 4% for future annuity charges, as used for KFI projections.

The outcome

Mostly respondents agreed with the proposals on annuity rates, although some felt that a rolling three month average would take out spikes and match the transfer period window.

Barring some actuaries, the proposals to use ONS statistics were also fine, although there was concern about underestimating life expectancy as members may have a life expectancy greater than the ONS would predict.

The growth rate to be used broadly had agreement or no comment, barring some respondents who thought this could lead to gaming the system.  Some respondents took this further, suggesting using a risk free growth rate. Some respondents objected to limiting the growth rate to the rate in KFIs as this may not appropriately reflect the expected performance of the investments.

The majority of respondents did not comment on the inclusion of charges. One respondent felt charges should not be included in the TVC, Another suggested TVCs should be completed with and without charges. Some respondents did not understand how the 4% expense assumption for annuity pricing was arrived at (as used in KFI projections), while others disagreed with using 4% as the assumption.

One respondent did not think adviser charges should be included if the client would have to pay them irrespective of the advice to transfer or if the charges were not deducted from the product. Another respondent said it would be inappropriate to include initial advice charges where these are paid by a sponsoring employer.

The regulator is proceeding with using a three month rolling annuity interest rate, using the ONS figures and as detailed in the TVC section the growth rates will now be on a “no risk” basis.

They are proceeding with the proposal to require firms to incorporate charges in APTAs, whether or not the client pays them through the receiving scheme. Where an adviser charge is payable by an employer or regardless of whether a transfer takes place (a non-contingent charge), advisers will not have to include the charges in the APTA.

This will be in effect from 01 April 2019.

What this could mean

Having clarity on assumptions and standardising these between a cap and collar should take away short term spikes in the assumed rates affecting the results.


The Discussion

In CP17/16, the FCA explained that advisers are responsible for the recommendations they provide and the analysis that supports their recommendations. This is the case, regardless of any checking of the advice or any shortcomings in the software. Even where software is obtained from a third party, firms cannot outsource their responsibility for ensuring that the software they use is fit for purpose. We also reminded firms of their responsibilities on providing or accepting inducements when giving or using free software. We sought views from advisers on these points.

The outcome

Mostly respondents generally agreed on the responsibilities. And there was then some debate on TVA systems, their value and if these are inducements.

The regulators response was that they made clear in CP 17/16 that where platforms or providers make free software available to advisers, firms should be aware of our rules on accepting benefits from providers. Since the publication of CP17/16, they have modified the rules and guidance on inducements for non- MiFID business to mirror more closely the new MiFID II inducement rules. This means that non-monetary benefits which were previously not included in the inducement rules are now included. We consider  it is unlikely that providing or accepting free TVA or APTA software would fall within the narrower definition and so should not be used. As a result non-monetary benefits which were previously not included in the inducement rules are now included.

What this could mean

Providers have already started withdrawing their free TVAS services as expected.

Other Points (in brief)

Stochastic Modelling

There was discussion in CP17/16 about the use of stochastic modelling for the APTA. After the responses the regulator is comfortable that this can be used, but highlighted that the outcomes at the 50th percentile are at least as cautious as the outcomes from using the assumptions in COBS 19 Annex 4C. There was also reference to various other COBS rules that must be applied to these.

Revaluation and indexation assumptions

Discussion was invited on the rates used for RPI/CPI and certain limited pension increases. However this has now been rolled over into Consultation Paper 18/7

Insistent Clients

CP17/16 set out our plans to consult separately dealing with insistent clients, because insistent clients also feature in areas of advice other than pension transfer advice.

In December 2017, the published PS17/2525 which confirmed the addition of Handbook setting out how firms may comply with FCA obligations when dealing with insistent clients. The guidance came into effect on 3 January 2018.

Overseas Transfers

The challenges for advisers advising a client who lives overseas and is therefore considering transferring safeguarded benefits abroad. This situation creates a number of additional complexities and risks, such as understanding the tax and regulatory regimes in the destination country. This may require the individual to consult an adviser in both the UK and the destination country. The FCA therefore asked a question about the impact of their proposals on overseas transfers.

The FCA considers that the approach they have set out in the policy statement can accommodate overseas transfers. But that firms should pay particular attention for the characteristics of the transfer and destination. Advisers should pay attention to the levels of returns and local inflation rates, relative to fluctuations in exchange rates, levels of charges on overseas arrangements, different tax considerations (including the possible charge on a Qualifying Recognised Overseas Pension Scheme), different legislative frameworks and local levels of protection (for example, the FSCS equivalent). However, they recognise that advisers may not be able to get sufficient understanding of the overseas regime, and the limitations of the advice should be highlighted.

Streamlined Advice

FAMR recommendations included proposals for streamlined advice, the regulator sought views on how this could apply to advising on safeguarded benefits.

The vast majority of respondents agreed that streamlined advice was not suitable for this area.

In September 2017, the regulator published FG17/8,27 which sets out expectations of firms providing streamlined advice. This stated that firms will need to consider the type of clients at whom a streamlined advice service is directed. It also noted that some financial products or transactions are unlikely to be appropriate for a streamlined advice process because of the amount of information the firm needs to make a suitable personal recommendation. The FCA agree with respondents that streamlined advice is unlikely to be achievable for pension transfers.

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