The new regulations governing person transfer comparisons remain flawed because the comparison is with an annuity and not the drawdown solution, which most clients opt for, argues Fowler Drew director of financial planning David Anderson.
The change came into force on 1 October, replacing the transfer value analysis (Tvas) report with an appropriate pension transfer analysis (APTA) including a transfer value comparator (TVC).
Yet Anderson believes it still contains weaknesses.
Doesn’t address a fundamental issue
He said: “It still has the same weaknesses as a critical yield calculation, in that you are showing a calculation that assumes annuity purchase. There is some logic to that because DB (defined benefit) is risk free, so you are comparing to risk free.
"It is a nudge in the right direction, but it stops short of where we need to be."
“But people are not transferring to fund an annuity purchase or to take a risk-free option. If they wanted risk free they would stay where they are.
“Fundamentally, they are saying pension scheme trustees have a lower capacity for loss for accounting reasons. We don’t have to. We can buy equities and ride our volatility rather than worry about scheme strength every three years or so. We can ride it out and get a better outcome.
“It is still an annuity assumption. It doesn’t address that fundamental issue.”
He also believes that, with its retreat from allowing advisers to start from a neutral position, the regulator was shying away from the fact that many of these transfer values are good value.
“They have gone back to the assumption that it is likely to be in the best interests of most clients to stay put. That has to be flawed if you see transfer values almost double, it should bring more people into the realm of transferring.”
Flawed, but an improvement
He said that it was, of course, difficult to give advice on the area and that the industry still struggled with the outcomes from drawdown.
“It involves cashflow modelling and as an industry we don’t seem to be in a position to work out what the outcomes might be from drawdown, where you might get 3% a year or 6% a year. In our firm, we use our own modelling to show best case to worst case and look at whether the worst case looks to be below the projected DB income.
“Then that is the answer you give the client. This could work out in your favour but there is a chance – a probability of X – that there is a lower outcome and then it is about considering capacity for loss.”
Despite this, he said the new system was still an improvement.
“It helps people get some context around the transfer value. In general, they are comparing a capital sum with an ongoing income stream. That is difficult for anyone to do. It is useful to help people see that what they are giving up has a large capital value attached to it as well.
“But it has a large capital value because you are assuming a certain sort of purchase. But if you are coming out of a DB scheme, you are saying: ‘I don’t want that. I want something a bit more flexible’. So it is slightly flawed.
“It is a nudge in the right direction, but it stops short of where we need to be. It should show the benefits of leaving a secured income for the potential benefits of an unsecured income and going to see if the client can that. Transfer values are inflated. They may be mispriced to the client’s advantage. It would be nice to see that recognised.”
