COBS 19.1 Pension transfers and opt-outs
Preparing and providing a transfer analysis
1If an individual who is not a pension transfer specialist gives a personal recommendation about a pension transfer or pension opt-out on a firm's behalf, the firm must ensure that the recommendation is checked by a pension transfer specialist.
A firm must:
- (1)
compare the benefits likely (on reasonable assumptions) to be paid under a defined benefits pension scheme with the benefits afforded by a personal pension scheme or stakeholder pension scheme , before it advises a retail client to transfer out of a defined benefits pension scheme;
- (2)
ensure that that comparison includes enough information for the client to be able to make an informed decision;
- (3)
give the client a copy of the comparison, drawing the client's attention to the factors that do and do not support the firm's advice, no later than when the key features document is provided; and
- (4)
take reasonable steps to ensure that the client understands the firm's comparison and its advice.
In particular, the comparison should:
- (1)
take into account all of the retail client's relevant circumstances;
- (2)
have regard to the benefits and options available under the ceding scheme and the effect of replacing them with the benefits and options under the proposed scheme;
3 - (3)
explain the assumptions on which it is based and the rates of return that would have to be achieved to replicate the benefits being given up; and3
- (4)
be illustrated on rates of return which take into account the likely expected returns of the assets in which the retail client's funds will be invested.3
When a firm compares the benefits likely to be paid under a defined benefits pension scheme with the benefits afforded by a personal pension scheme or stakeholder pension scheme (COBS 19.1.2R (1)), it must:
- (1)
assume that:
(a) the annuity interest rate is the intermediate rate of return appropriate for a level or fixed rate of increase annuity in (2COBS 13 Annex 2 3.1R(6))2) unless COBS 19.1.4B R applies3 or the rate for annuities in payment (if less);3
(b) the retail prices index is
2.5%
(c) the average earnings index and the rate for section 21 orders is
4.0%
(d) the pre-retirement limited price indexation revaluation is
2.5%
(e) the annuity rate for3 post-retirement limited price increases with maximum increases less than or equal to 3.5% or with minimum increases more than or equal to 3.5% is the rate in (a) above; otherwise it is the rate in (f) below;3
33 (f) the index linked pensions rate is the intermediate rate of return in 2COBS 13 Annex 2 3.1 R (6)2 for annuities linked to the retail prices index unless COBS 19.1.4B R applies;3
(g) the mortality rate used to determine the annuity is based on the year of birth rate derived from each of the Institute and Faculty of Actuaries’ Continuous Mortality Investigation tables PCMA00 and PCFA00 and including mortality improvements derived from each of the male and female annual mortality projections models, in equal parts;3
or use more cautious assumptions;
- (2)
calculate the interest rate in deferment; and
- (3)
have regard to benefits which commence at difference times.
3For any year commencing 6 April, the use of the male and female annual CMI Mortality Projections Models in the series CMI(20YY-1)_M_[1.25%] and CMI(20YY-1)_F_[1.25%], where YY-1 is the year of the Model used, will tend to show compliance with COBS 19.1.4R (1)(g).
3Firms must apply the annual provisions at COBS 13 Annex 2 3.1R(6) on a monthly basis in any month where the yields on the 15th of the relevant month would give a rolling 12 month average annuity rate that varies by at least 0.2% from the previous rate.
If a firm arranges a pension transfer or pension opt-out for a retail client as an execution-only transaction, the firm must make, and retain indefinitely, a clear record of the fact that no personal recommendation was given to that client.
Suitability
When advising a retail client who is, or is eligible to be, a member of a defined benefits occupational pension scheme whether to transfer or opt-out, a firm should start by assuming that a transfer or opt-out will not be suitable. A firm should only then consider a transfer or opt-out to be suitable if it can clearly demonstrate, on contemporary evidence, that the transfer or opt-out is in the client's best interests.
When a firm advises a retail client on a pension transfer or pension opt-out, it should consider the client’s attitude to risk in relation to the rate of investment growth that would have to be achieved to replicate the benefits being given up.
3When giving a personal recommendation about a pension transfer, a firm should clearly inform the retail client about the loss of the fixed benefits and the consequent transfer of risk from the defined benefits pension scheme to the retail client, including:
- (1)
the extent to which benefits may fall short of replicating those in the defined benefits pension scheme ;
- (2)
the uncertainty of the level of benefit that can be obtained from the purchase of a future annuity and the prior investment risk to which the retail client is exposed until an annuity is purchased with the proceeds of the proposed personal pension scheme or stakeholder pension scheme; and
- (3)
the potential lack of availability of annuity types (for instance, annuity increases linked to different indices) to replicate the benefits being given up in the defined benefits pension scheme.
3In considering whether to make a personal recommendation, a firm should not regard a rate of return which may replicate the benefits being given up from the defined benefits pension scheme as sufficient in itself.
When a firm prepares a suitability report it should include:
- (1)
a summary of the advantages and disadvantages of its personal recommendation;
- (2)
an analysis of the financial implications (if the recommendation is to opt-out); and
- (3)
a summary of any other material information.
If a firm proposes to advise a retail client not to proceed with a pension transfer or pension opt-out, it should give that advice in writing.