New Rules ‘Ensure’ Pension Transfers Are Suitable for Scheme Members
The Financial Services Authority (FSA) has published new rules and guidance, following consultation, to strengthen the protection for members of defined benefit pension schemes who are considering moving their money into personal pensions.
The changes are designed to deal with the FSA’s concern that in most cases a pension transfer is not in the best interest of pension scheme members.
The FSA is raising the standards on the assumptions used when a pension transfer value analysis (TVA) is made. This will make it less likely that an adviser will be able to recommend a transfer from a defined benefit pension scheme to a personal pension.
Respondents to the consultation welcomed the changes and there was broad support for updating and clarifying the assumptions.
As a result of the consultation, a number of changes have been made to the proposed rules to ensure a fairer analysis of a pension transfer, including:
a. CPI (Consumer Price Index)-linked benefits will be valued using a CPI-linked annuity rate, instead of an RPI (Retail Price Index)-linked annuity rate as proposed in the consultation paper. The FSA will consult separately on the CPI rate to ensure consistency with the CPI assumption determined for CPI in deferment.
b.The new rules introduce explicit LPI (Limited Price Index)-linked annuity rates to be used to value limited RPI pension increases, taking into account the caps and collars. These rules clarify the approach advisers should take when calculating pension increases.
c.A 12 month rolling annuity interest rate (AIR) will be introduced between the annual standard reviews of the AIR, so that advisers are using the most up-to-date rate in their assessments.
d.New guidance has been introduced which requires advisers to clearly communicate the transfer of risk from the employer to the member.
Sheila Nicoll, director of conduct policy at the FSA, said: “In the vast majority of cases someone in a defined benefit pension scheme will not be better off transferring to a personal pension. The new assumptions will make it tougher for advisers to make the case for a transfer. As a result of these new rules, we would expect the number of pension transfers to decrease, leaving pension scheme members better off.”