eValue FE agrees with the FSA’s proposed changes to the assumptions used by advisers carrying out corporate Defined Benefit (DB) pension transfers and, in particular, welcomes its support for stochastic projections.The FSA proposed assumption changes are consistently cautious and will raise the critical yield required for a positive recommendation to transfer out of a DB pension plan. The FSA considered making stochastic projections mandatory as a means of communicating the transfer of risk and reward from employer to employee when a DB member takes a transfer. However, it hasstopped short of requiring advisers to use stochastic projections when advising members on the merits of an Enhanced Transfer offers.As a result, due to the inadequacies of deterministic projections which are currently widely used to communicatethe relative merits of DB and DC (defined contribution) pension benefits, the FSA has taken a very cautious approach to settingassumptions for what it considers to be a high risk business.
“Deterministic projections do notillustrate the risks involved in a transfer from a DB scheme nor the probabilitythat a DC pension might produce a better or worse outcome. In addition, there is a risk that members looking a deterministic projectionswill assume that the figures given are certainties or that just because the transfer value passed the critical yield test a better outcome is assured”, states Mark Grimes, Product Director, eValue FE. “We welcome the FSA’s support for stochastic projections. They enable pension plan members considering transfer value offers to understand the risk they are taking on if they forgo their DB entitlements.”
Using deterministic projections when advising members on the merits of DB pension transfers, does not help members understand the issues and worse still can convey a false sense of certainty about outcomes. Because the FSA considers that DB transfer business has a high risk of customer detriment, it is proposing to adopt very cautious assumptions.Making stochastic projections mandatorywould improve the communication of the issues involved in DB transfers and would reduce the need for overly cautious assumptions for valuing the DB benefits given up on transfer. Stochastic projections would enable DB members to make informed decisions about the relative merits of DB and DC pensions.
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