A pension transfer is where an occupational defined benefits pension is moved to a personal pension. A full definition of a pension transfer can be found in the handbook glossary.

Where an individual is switching from one personal pension to another, for example, from a personal pension to a SIPP or from one occupational trust-based scheme to another, this is not a pension transfer.

Areas of concerns

We have seen a number of instances where firms are not providing sufficient evidence for recommending a transfer, or the reasons given were not specific to the client.  We have also seen clients with different attitude to risks being advised to invest in the same fund with little or no justification. Firms need to ensure their risk profiling procedures are in-line with the good practice we published.

The starting point for any transfer should be that it is in the members/clients best interest.

Permissions

Our rules (COBS) require firms advising on pension transfers to have a specific permission – advising on pension transfers and opt-outs. Firms who wish to carry out pension transfer business must apply for this permission. If a firm does not have these permissions, they cannot undertake this activity.

In addition to the firm having the required permission, the advice must be given, or checked by, a pension transfer specialist. A pension transfer specialist must follow our training and competence rules, and have the necessary qualifications and with that, the permission to perform the function. You can select this exam from the List of Appropriate Examinations maintained by the Financial Services Skills Council (FSSC).

Transfer Value Analysis (TVA)

Our rules require a transfer value analysis (TVA) to compare the benefits being given up from a defined benefit pension scheme with those that could be offered by a personal pension scheme.

We were advised of potential misuse of the existing assumptions used in a TVA, particularly when valuing pension increases in retirement.

We have therefore published new rules and guidance in a Policy Statement (PS12/8), following consultation, to strengthen the protection for members of defined benefit pension schemes who are considering moving their money into personal pensions.

As a result of the consultation, a number of changes have been made to the rules to ensure a fairer analysis of a pension transfer, including:

• The rules for calculating mortality will, as set out in CP12/4, be aligned with those used by the Board for Actuarial Standards. This will make them consistent with annual pension statements that all personal pension holders receive once a year.
• The new rules introduce explicit LPI-linked annuity rates to be used to value LPI pension increases. The new rules state the following: for caps of 3.5% and below, fixed rate escalation based on the cap should be used; for collars of 3.5% or above, fixed rate escalation based on the cap (if there is one) should be used; and in all other cases, the RPI annuity rate should be used.
• The annuity interest rate (AIR) will be reviewed more frequently. The new rules include a provision for TVA which, in addition to the standard review of the AIR on 6 April each year, introduces a 12-month rolling average which must be applied in between the standard reviews.
• New guidance has been introduced. The comparison provided to the member should be illustrated on growth rates that take into account the likely returns of the pension fund assets. The new guidance clarifies the need for advisers to discuss these risks with members.

Actions to take

If you have acted out of scope of your permission, you need to have the business reviewed by a suitably qualified person to ensure the advice given was suitable. You should also review your system and controls, to make sure this does not happen in the future.

Firms need to think more actively about how the comparison and the recommendations are presented to clients and their ability to understand the long documents that they receive.

Further Information

Factsheet: Pension Transfers - who can do what and when

Pension transfers – frequently asked questions

Consultation Paper - Pension transfer value analysis assumptions

Help and guidance on how to vary your permission