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COBS 19.1 Pension transfers, conversions, and opt-outs5

Application

COBS 19.1.-1R
  1. (1)

    5This section applies to a firm that gives advice or a personal recommendation about a pension transfer, a pension conversion or a pension opt-out.

  2. (2)

    This section does not apply to a firm that gives advice or a personal recommendation in relation to:

    1. (a)

      a pension transfer, pension conversion or pension opt-out in relation to which the only safeguarded benefit is a guaranteed annuity rate;

    2. (b)

      a pension transfer in which the retail client proposes to transfer out of a defined contribution occupational pension scheme where that client has no safeguarded benefits under that scheme.

Preparing and providing a transfer analysis

COBS 19.1.1RRP

1If an individual who is not a pension transfer specialist gives advice or 5a personal recommendation about a pension transfer, a pension conversion 5 or pension opt-out on a firm's behalf, the firm must ensure that the recommendation or advice 5 is checked by a pension transfer specialist.

COBS 19.1.2RRP

A firm must:

  1. (1)

    compare the benefits likely (on reasonable assumptions) to be paid under a defined benefits pension scheme or other pension scheme with safeguarded benefits 5with the benefits afforded by a personal pension scheme, 5stakeholder pension scheme or other pension scheme with flexible benefits5, before it advises a retail client to transfer out of a defined benefits pension schemeor other pension scheme with safeguarded benefits5;

  2. (2)

    ensure that that comparison includes enough information for the client to be able to make an informed decision;

  3. (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, in good time, and in any case 5no later than when the key features document is provided; and

  4. (4)

    take reasonable steps to ensure that the client understands the firm's comparison and its advice.

COBS 19.1.2ARRP

5A firm need not carry out the comparison described in COBS 19.1.2R if:

  1. (1)

    the retail client wishes to crystallise benefits immediately after the pension transfer or pension conversion; and

  2. (2)

    the retail client is at normal retirement age under the rules of the ceding scheme.

COBS 19.1.3GRP

In particular, the comparison should:

  1. (1)

    take into account all of the retail client's relevant circumstances;

  2. (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. (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;

    35
  4. (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; and5

    35
  5. (5)

    where an immediate crystallisation of benefits is sought by the retail client prior to the ceding scheme’s normal retirement age, compare the benefits available from crystallisation at normal retirement age under that scheme.5

COBS 19.1.4RRP

When a firm compares the benefits likely to be paid under a defined benefits pension scheme or other pension scheme with safeguarded benefits 5with the benefits afforded by a personal pension scheme, 5stakeholder pension scheme or other pension scheme with flexible benefits 5 (COBS 19.1.2R (1)), it must:

5
  1. (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

    44

    (b) the RPI4 is

    4

    2.5%

    (c) the average earnings index and the rate for section 21 orders is

    4.0%

    (d) for benefits linked to the RPI,4 the pre-retirement limited price indexation revaluation is

    2.5%

    (e) the annuity interest4 rate for3 post-retirement limited price indexation based on the RPI4 with maximum pension4 increases less than or equal to 3.5% or with minimum pension4 increases more than or equal to 3.5% is the rate in (a) above allowing for increases at the maximum rate of pension increase4; otherwise it is the rate in (f) below;3

    43    		 3

    (f) the index linked annuity interest4 rate for pension benefits linked to the RPI4 is the intermediate rate of return in 2COBS 13 Annex 2 3.1 R (6)2 for annuities linked to the RPI4 unless COBS 19.1.4B R applies;3

    44

    (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 PMA086 and PFA086 and including mortality improvements derived from each of the male and female annual mortality projections models, in equal parts;3

    4

    4(h) for benefits linked to the CPI, the pre-retirement limited price indexation revaluation is

    2.0%

    4(i) the index linked annuity interest rate for pension benefits linked to the CPI is the intermediate rate of return in COBS 13 Annex 2 3.1R(6) for annuities linked to the RPI plus 0.5% unless COBS 19.1.4B R applies in which case it is the annuity rate in COBS 19.1.4B R plus 0.5%;

    4(j) the annuity interest rate for post-retirement limited price indexation based on the CPI with maximum pension increases less than or equal to 3.0% or with minimum pension increases more than or equal to 3.5% is the rate in (a) above allowing for increases at the maximum rate of pension increase; where minimum pension increases are more than or equal to 3% but less than 3.5% the annuity rate is the rate in (a) above allowing for increases at the minimum rate of pension increase otherwise it is the rate in (i) above;

    or use more cautious assumptions;

  2. (2)

    calculate the interest rate in deferment; and

  3. (3)

    have regard to benefits which commence at difference times.

COBS 19.1.4AERP

3For any year commencing 6 April, the use of the male and female annual CMI Mortality Projections Models in the series CMI(20YY-2_M_[1.25%]6 and CMI(20YY-2_F_[1.25%]6, where YY-26 is the year of the Model used, will tend to show compliance with COBS 19.1.4R (1)(g).

COBS 19.1.4BRRP

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.

COBS 19.1.5RRP

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

COBS 19.1.6GRP

When advising a retail client who is, or is eligible to be, a member of a defined benefits occupational pension scheme or other scheme with safeguarded benefits 5whether to transfer, convert 5 or opt-out, a firm should start by assuming that a transfer, conversion 5 or opt-out will not be suitable. A firm should only then consider a transfer, conversion 5 or opt-out to be suitable if it can clearly demonstrate, on contemporary evidence, that the transfer, conversion 5 or opt-out is in the client's best interests.

COBS 19.1.7GRP

When a firm advises a retail client on a pension transfer, pension conversion 5 or pension opt-out, it should consider the client’s attitude to risk including, where relevant, 5in relation to the rate of investment growth that would have to be achieved to replicate the benefits being given up.

COBS 19.1.7AGRP

3When giving a personal recommendation about a pension transfer or pension conversion, 5a firm should clearly inform the retail client about the loss of the safeguarded benefits 5 and the consequent transfer of risk from the defined benefits pension scheme or other scheme with safeguarded benefits 5to the retail client, including:

55
  1. (1)

    the extent to which benefits may fall short of replicating those in the defined benefits pension scheme or other scheme with safeguarded benefits5;

  2. (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. (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.

COBS 19.1.7BGRP

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 or other scheme with safeguarded benefits 5as sufficient in itself.

COBS 19.1.8GRP

When a firm prepares a suitability report it should include:

  1. (1)

    a summary of the advantages and disadvantages of its personal recommendation;

  2. (2)

    an analysis of the financial implications (if the recommendation is to opt-out); and

  3. (3)

    a summary of any other material information.

COBS 19.1.9GRP

If a firm proposes to advise a retail client not to proceed with a pension transfer, pension conversion 5 or pension opt-out, it should give that advice in writing.

COBS 19.1.10GRP

5Where a firm has advised a retail client in relation to a pension transfer, pension conversion or pension opt-out, and the firm is asked to confirm this for the purposes of section 48 of the Pension Schemes Act 2015, then the firm should provide such confirmation as soon as reasonably practicable.