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COBS 19.1 Pension transfers, conversions, and opt-outs5

Application

COBS 19.1.-1R

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COBS 19.1.-1AR

7This section applies to a firm which gives advice on pension transfers, pension conversions and pension opt-outs to a retail client in relation to:

  1. (1)

    a pension transfer from a scheme with safeguarded benefits;

  2. (2)

    a pension conversion; or

  3. (3)

    a pension opt-out from a scheme with safeguarded benefits or potential safeguarded benefits.

COBS 19.1.-1BG

7A firm should comply with this section in order to give appropriate independent advice for the purposes of section 48 of the Pension Schemes Act 2015.

COBS 19.1.1RRP

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Requirement for pension transfer specialist

COBS 19.1.1AR
  1. (1)

    7A firm must ensure that advice on pension transfers, pension conversions and pension opt-outs is given or checked by a pension transfer specialist.

  2. (2)

    The requirement in (1) does not apply where the only safeguarded benefit involved is a guaranteed annuity rate.

Role of the pension transfer specialist when checking

COBS 19.1.1BG

7When a firm uses a pension transfer specialist to check its proposed advice on pension transfers, pension conversions and pension opt-outs, it should ensure that the pension transfer specialist takes the following steps:

  1. (1)

    checks the entirety and completeness of the advice;

  2. (2)

    confirms that any personal recommendation is suitable for the retail client in accordance with the obligations in COBS 9.2.1R to 9.2.3R and including those matters set out at COBS 19.1.6G; and

  3. (3)

    confirms in writing that they agree with the proposed advice before it is provided to the retail client, including any personal recommendation.

Personal recommendation for pension transfers and conversions

COBS 19.1.1CR
  1. (1)

    7A firm must make a personal recommendation when it provides advice on conversion or transfer of pension benefits.

  2. (2)

    Before making the personal recommendation the firm must:

    1. (a)

      determine the proposed arrangement with flexible benefits to which the retail client would move; and

    2. (b)

      carry out the comparison in COBS 19.1.2R.

  3. (3)

    The requirement in (2)(b) does not apply if either:

    1. (a)

      the only safeguarded benefit involved is a guaranteed annuity rate; or

    2. (b)

      the retail client is at normal retirement age under the rules of the ceding arrangement and wishes to crystallise benefits immediately after the pension transfer or pension conversion.

COBS 19.1.1DG

7COBS 9 contains suitability requirements which apply if a firm makes a personal recommendation in relation to advice on conversion or transfer of pension benefits.

The comparison

COBS 19.1.2RRP

To prepare a comparison, a7 firm must:

  1. (1)

    compare the benefits likely (on reasonable assumptions) to be paid under the ceding arrangement7 with the benefits afforded by the proposed arrangement7;

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  2. (2)

    ensure that that comparison includes enough information for the retail client7 to be able to make an informed decision;

  3. (3)

    give the retail client7 a copy of the comparison, drawing the retail client's7 attention to the factors that do and do not support the firm's personal recommendation7, 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 retail client7 understands the firm's comparison and how it contributes towards the personal recommendation7.

COBS 19.1.2ARRP

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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 arrangement7 and the effect of replacing them with the benefits and options under the proposed arrangement7;

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  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;

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  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

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  5. (5)

    where an immediate crystallisation of benefits is sought by the retail client prior to the ceding arrangement’s7 normal retirement age, compare the benefits available from crystallisation at normal retirement age under that arrangement7.5

COBS 19.1.4RRP

When a firm carries out the comparison7 it must:

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  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

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    (b) the RPI4 is

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    2.5%

    (c) the average earnings index and the rate for section 1487 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

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    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

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    (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;

    [Note: section 148 orders are orders made by the Secretary of State under section 148 of the Social Security Administration Act 1992. Section 148(7) of this Act provides that orders made previously under section 21 of the Social Security Pensions Act 1975 will be treated as orders made under section 148.]7

  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

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Guidance on assessing suitability

COBS 19.1.6GRP
  1. (1)

    The guidance in this section relates to the obligations to assess suitability in COBS 9.2.1R to 9.2.3R.7

  2. (2)

    When a firm is making a personal recommendation for a retail client who is, or is eligible to be, a member of a pension scheme with safeguarded benefits and who is considering whether to transfer, convert or opt-out, a firm should start by assuming that a transfer, conversion or opt-out will not be suitable.7

  3. (3)

    A firm should only consider a transfer, conversion or opt-out to be suitable if it can clearly demonstrate, on contemporary evidence, that the transfer, conversion or opt-out is in the retail client’s best interests.7

  4. (4)

    To demonstrate (3), the factors a firm should take into account include:7

    1. (a)

      the retail client’s intentions for accessing pension benefits;7

    2. (b)

      the retail client’s attitude to, and understanding of the risk of giving up safeguarded benefits (or potential safeguarded benefits) for flexible benefits;7

    3. (c)

      the retail client’s attitude to, and understanding of investment risk;7

    4. (d)

      the retail client’s realistic retirement income needs including:7

      1. (i)

        how they can be achieved; 7

      2. (ii)

        the role played by safeguarded benefits (or potential safeguarded benefits) in achieving them; and 7

      3. (iii)

        the consequent impact on those needs of a transfer, conversion or opt-out, including any trade-offs; and7

    5. (e)

      alternative ways to achieve the retail client’s objectives instead of the transfer, conversion or opt-out.7

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COBS 19.1.7GRP

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COBS 19.1.7AGRP

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COBS 19.1.7BGRP

If a firm has carried out the comparison in COBS 19.1.2R and it has indicated7 a rate of return which may replicate the benefits being given up from the arrangement with safeguarded benefits, the firm should not regard this7 as sufficient in itself to ensure a personal recommendation is suitable7.

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Record keeping and suitability reports

COBS 19.1.7CR

7If a firm arranges a pension transfer or pension opt-out for a retail client without making a personal recommendation it must:

  1. (1)

    make a clear record of the fact that no personal recommendation was given to that client; and

  2. (2)

    retain this record indefinitely.

COBS 19.1.8GRP

If a firm provides a suitability report to a retail client in accordance with COBS 9.4.1R7 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.

The statutory advice requirement

COBS 19.1.10GRP

5Where a firm has advised a retail client in relation to a pension transfer or pension conversion7, 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.