FCA Pension transfer advice

12 September 2019

i4C Technology responds to FCA pension transfer advice

FCA 19/25: Pension transfer advice: contingent charging and other proposed changes

Context and background

The FCA Consultation Paper 19/25 sets out the proposed measures to change how advisers manage and deliver pension transfer advice, particularly for defined benefit (DB) to defined contribution (DC) transfers.

In the consultation the FCA refers to several shortcomings the it has identified where cashflow modelling has been used as part of the Appropriate Pension Transfer Analysis (APTA). The FCA is concerned that, as a result of these shortcomings, advisers may be giving clients unrealistic expectations of future income.

i4C Technology felt obligated to comment on the FCA Consultation Paper. In particular the considerations raised on the use of cashflow modelling which are set out in sections 8.22 to 8.24 of CP19/25.


i4C Technology agrees in principle with the matters raised and the proposals outlined in the Consultation Paper (8.22 to 8.24). We do, however, feel that they could go further. In addition, whilst this paper looks specifically at DB pension transfer advice, we consider that the FCA should be applying these principles to further areas of cashflow modelling advice. In particular, this should extend to any irrevocable decision a client is making – such as making gifts or selling certain classes of assets.

The FCA is proposing several new rules intended to overcome the issues identified where firms choose to use cashflow modelling.
Our comments on these specific proposals in 8.24 are as follows:

Point 1

“Firms must prepare cashflow models in real terms, for example, in today’s money terms. This will make sure the models are consistent with other mandated documents such as key features illustrations (KFIs).”

i4C Comment: 

We agree that it is important to present clients with results in ‘real’ terms but believe that there is also value to the client in viewing results in ‘nominal’ (where future values are not discounted back into today’s money). Viewing in nominal can help the client understand the ‘actual’ forecasted amount of money required in the future to meet their future goals and targets.

This can be an important step to then understand what ‘real’ data is showing and how those results have been calculated via the discounting of inflation. The proposed measures may direct planners down a route that misses out this crucial step and, as a result, clients may not be fully informed and ultimately suffer.

As such, we feel that the proposal should be amended along the following lines:

“Cashflow models should be prepared in real but should also be supplemented with results in nominal where there is client benefit in doing so”.


Point 2

“Firms must make sure that tax bands and tax limits are set using reasonable assumptions if they model net income from year to year. The use of real terms’ modelling should facilitate appropriate indexation.”

i4C Comment:

We strongly believe that tax should be a core element of a cashflow model. This means that income should be included ‘gross’ to the modelling application which should calculate the underlying tax charges as an integral part of the whole process.

For many clients the tax rates paid on income and investments will vary significantly from year to year depending on a large number of variables within their plan. This is especially the case nearing and shortly after retirement – even more so with the advent of the flexibility that pension freedoms has introduced.

This is impossible to accurately reflect within a ‘net of tax’ system. Due to the complexity of the UK tax system it is also extremely easy for any tax charges to be missed or incorrectly calculated if not included with the system – especially when amending variables in scenarios.

As such we would like to see the proposal amended to:

“Firms should only use cashflow modelling applications where income is added gross and tax is calculated and applied automatically to the forecasts by the underlying model”


Point 3

“The model should explicitly allow for taxes or constraints that are likely to arise on a transfer that would not occur if safeguarded benefits were retained, such as a Lifetime Allowance charge, any tax applicable on the death of the client, or the application of the money purchase annual allowance.”

i4C Comment:

We strongly agree with this statement as per outlined in the response to the previous proposal on taxation. Not accounting correctly for tax (which could significantly change between scenarios) could have a material impact on the plan and, therefore, compromise sound decision making.


Point 4

“The modelling must include stress testing scenarios to illustrate the impact of less favorable future scenarios so that the client can see more than one potential outcome.”

i4C Comment:

We fully agree with this statement. We believe that any irrevocable decision a client is making should be accompanied by the most robust stress testing. Whilst this includes pension transfers it also extends to many more common forms of advice such as gifting as part of estate planning.

Stress testing should not just look at the realistic worst case. It should also focus on and establish the factors or circumstances that would give rise to a worse position than taking no action (often known as the ‘break-even’).

This information will help clients make more informed decisions and ensure they are aware of the risks associated with the decision. There are many ways to stress test a plan so we would not expect the FCA to prescribe any approaches. Firms should however, be strongly encouraged to ensure that their approach is extensive and follows a consistent set of methodologies and interpretation.

James Calvert-Jones
Head of Product, i4C Technology