FSA introduces optional simplified approach to test the financial viability of a phase 2 pension transfer sale

This alternative approach to determining financial viability will reduce the amount of data collection required and also makes the calculations themselves easier to perform than under the standard prescribed procedures. Firms that opt to use the simplified approach to demonstrate financial viability will in almost all cases experience a substantial reduction in per case administration costs.

Testing carried out by the regulators has shown that the simplified financial viability test will enable firms to continue to ensure that consumers receive appropriate redress.

Notes for editors

1. In 1994/95 the Financial Services regulators set out a programme of review by authorised firms of personal pensions sold between April 1988 and June 1994. The review was to identify cases where people were badly advised to opt out of, not join, and/or transfer funds from an occupational pension scheme to a personal pension.

2. The review announced in 1994 required firms to review proactively certain categories of investors most at risk from having lost out from bad advice the priority cases. In August 1998, the regulators announced a further stage of the review phase 2. Phase 2 covers younger investors and those not in the priority categories.

3. Firms responsible for phase 2 reviews report that the phase 2 population of transfers for review is nearly half a million. At this stage in phase 2, it is not possible to determine how many of these cases will reach the loss assessment stage this will depend on the number excluded and the number found to be associated with compliant advice.

4. OCT allows firms an alternative approach to assessing the compliance (or otherwise) of advice provided to a consumer at the time that the initial transfer was arranged. It seeks to establish
   • whether the transfer was financially viable; and
   • whether the investor was appropriately advised (in the light of rules in place at the time) on the nature of the transaction and its associated risks.

   The OCT comprises four tests, one of which is the Financial Viability Test (FVT). The FVT is an assessment of whether the transfer value available from the occupational pension scheme could have been reasonably expected (on prescribed financial and demographic assumptions that reflect conditions at the time of the transaction) to have been sufficient to provide the same level of benefits as the scheme would have provided at the time of retirement.

5. Full details of the simplified approach to assessing financial compliance, including a full specification of the calculation procedure, are available to reviewing firms on the FSA''s web-site (www.fsa.gov.uk/pensions-review/) or on request from Customer Relations Limited on 01707 373700.

6. This announcement does not require any action on the part of investors. Investors that have concerns can call the FSAs Pensions Helpline on 020 7417 7001.

7. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the protection of consumers; and fighting financial crime.

8. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.

Appended information

This guidance is available from the publications section of our web site. The direct URL is http://www.fsa.gov.uk/pubs/policy/FVT.pdf.