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FCA asks if cashflow planning should be used for DB reports

FCA asks if cashflow planning should be used for DB reports

The FCA has asked advisers for their views on using cashflow modelling tools for building and communicating new pension transfer valuation reports. 

In a consultation paper published today the regulator put forward a replacement for current transfer value analysis (TVAS) used by advisers when recommending whether or not to complete a defined benefit (DB) transfer. 

The new system has been called an appropriate pension transfer analysis (APTA). In the paper the FCA said APTAs would include ‘obtaining an understanding of the client’s potential cashflows.’

It went on to say it had considered if stochastic modelling was the best way to do this. Stochastic modelling typically forms the basis of cashflow modelling tools.

‘We know that a number of advisers use stochastic financial planning software for future cashflow modelling and to demonstrate the uncertainties of investment and mortality.

‘We have considered carefully whether an appropriate analysis which includes the potential outcomes from the proposed receiving scheme could be undertaken on a stochastic basis and easily communicated to the client.’

The regulator questioned if an APTA communicated with cashflow modelling software would be in line with the Key Features Illustration (KFI) which needs to be built on deterministic modelling.

‘It is our preference that the role played by the proposed receiving scheme is communicated to the client in the advice as consistently as possible with the KFI which will be provided to the client if a transfer was to proceed.

‘This does not prevent firms from using stochastic software for holistic financial planning but it does require… the advice can be justified to the client by reference to a deterministic analysis which is consistent with a KFI, where relevant.’

Finally the FCA asked advisers to share their views on this and share evidence clients understand cashflow modelling reports.

‘We are interested to receive firms’ views on reconciling stochastic cashflow modelling and APTAs more broadly with other mandated projections in the transfer advice process.

‘In particular, we welcome robust evidence on consumers’ ability to understand the outcomes of stochastic modelling,’ it stated.

Advisers can find details of how to respond to the FCA here

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