The new Transfer Value Comparator – showing what it could cost you to take a DB transfer
DB transfer activity has begun to stabilise, with far more transfers being quoted and taken every quarter compared with the position before the new freedom and choice flexibilities were introduced by the Government in 2015.
That is the key finding of LCP’s latest quarterly review of the transfer experience of the pension schemes we administer.
But will this be the calm before a new storm, that’s about be created by the new Transfer Value Comparator (TVC)? This is something which the Financial Conduct Authority (FCA) will require all financial advisers to give from 1 October 2018, when providing financial advice on a potential DB transfer.
In simple terms, the TVC will show in graphical form both the transfer which has been offered by the DB scheme, and the estimated “risk free” cost of replacing the client’s DB income through an insured annuity.
The TVC will replace the current requirement of providing a “TVAS” report, which concentrates on the investment return needed in order to replace a member’s benefits.
One of the FCA’s aims of introducing TVCs is to provide financial advisers and their clients with a clear and simple measure of the cost of flexibility - that is, the financial cost of giving up a promised pension income in order to achieve a member’s objectives (which may for example be a more flexible income, better provision for dependants, or the creation of a tax-efficient family asset).
For the large majority of schemes, we expect there to be a substantial gap between the transfer value and TVC replacement cost. This is due to the “risk-free” nature of the required FCA assumptions underlying the replacement cost, including the cost of purchasing an annuity at retirement. There is also likely to be a wide range of outcomes for different schemes, depending in particular on their investment strategies – with the most “generous” schemes offering transfer values in some cases double those of less generous schemes, for pensions with the same value when calculated using the TVC basis.
This may well come as a surprise to many members and financial advisers, and generate significant concern and debate in the media – with trustees of schemes offering “less generous” transfer values in particular being in the spotlight.
The new TVC disclosures may also have the following impacts on the transfer decisions some members make:
- They may decide that transfer values with lower TVC replacement percentages are not worth transferring
- They may delay taking their transfers until just before retirement, when the TVC replacement percentage is likely to be at its highest
- The TVC may provide a useful metric to help members to decide between two or more transfers from different schemes they have benefits in.
We’ll continue keeping track of the transfer experience of the schemes LCP administer, and in our future reports look at whether the introduction of the TVC has changed member behaviours – watch this space!
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