A firm must:
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;
ensure that that comparison includes enough information for the client to be able to make an informed decision;
In particular, the comparison should:
take into account all of the retail client's relevant circumstances;
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
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
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:
(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
(c) the average earnings index and the rate for section 21 orders is
(d) the pre-retirement limited price indexation revaluation is
(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;33
(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;
calculate the interest rate in deferment; and
have regard to benefits which commence at difference times.
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.
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:
the extent to which benefits may fall short of replicating those in the defined benefits pension scheme ;
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
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.