The CII AF7 February 2022 Exam in Review
We’re looking at the exam paper from the CII’s February 2022 sitting of AF7 – the Pension Transfer exam.
You can find the question paper here.
In this paper, Section A had 30 marks allocated to it, and Section B had 70 marks.
Section A
There were four questions in section A. As so often happens, the first one was a compliance question which asked us to outline the required content of a personalised charges communication. This was a straightforward question which required little more than a list of the required details and should have been relatively simple marks for those who work with defined benefit (DB) transfers on a day-to-day basis. The CII, however, commented that it was answered poorly overall, which was described as a common theme with regulatory/compliance questions. It is always worth memorising the basic compliance requirements associated with DB transfers. They come up regularly and are simple marks for those who are well prepared.
In Question 2, we were introduced to Adele who had received a cash equivalent transfer value and had a statement which showed guaranteed minimum pension (GMP) benefits. We were asked to outline the factors we would consider regarding her GMP when advising her on whether to transfer her defined benefit pension scheme. GMP is a tricky area, however, the CII commented that this was answered well, possibly as it has come up on several occasions recently.
Question 3 covered sequencing risk, asking for a straightforward explanation of what it is and strategies that could be used to mitigate it. This, again, has been tested on multiple previous occasions and the CII commented that most answers were quite good on the first part, however, marks were lost on the second for repeating the same point in different ways.
Finally, Question 4 covered the acceptance of an enhanced transfer value (ETV) for a client who has fixed protection 2012. Care should always be taken when advising a client to accept an ETV as it would invalidate any form of fixed or enhanced protection. This will be lost on acceptance as it is not a permitted transfer, since as a result of the enhancement, it is not actuarially equivalent to the value of the scheme benefits.
The feedback observed that marks were lost on the third part, which concerns actions he could take to mitigate the loss of protection should he accept the transfer as the question was not read correctly. The answer the CII wanted was to apply for IP16, which is still available and not lost by accepting a non-permitted transfer.
Here's a review of the Feb 22 exam paper for #CII #AF7. Share on X
Section B
Case Study 1
In this case study, we met Aadan, who was widowed last year, recently retired and has yet to inform his scheme administrators of how he wishes to take his benefits. He has a deferred defined benefit scheme and a personal pension.
The first question concerned the transfer value comparator and why it may not be a significant factor when recommending whether Aadan should transfer his defined benefit pension. This required a detailed knowledge of the workings of the transfer value comparator and the CII commented that it threw a number of candidates.
Question 6 was a more straightforward recommend-and-justify type of question. This was the type of variant you sometimes see with the CII, where the recommendation was given for you and candidates had to justify that recommendation. Nonetheless, good marks should have been available for well-prepared candidates. The challenge may have been coming up with sufficient points to gain all the marks, given that some of the model answers were quite imaginative.
Question 7 concerned the death benefits available to Aadan’s son, Femi, on his death from a flexi-access drawdown plan and why it is important that he completes nominations. This is a plain vanilla question which has been asked on numerous occasions previously and it should have been possible to get very close to full marks.
Case Study 2
In case study 2, we met Gino, aged 53, self-employed and looking to phase retirement from age 60 through to 65. His wife Etta, aged 42 maybe a tad ambitiously wanted to retire at the same time he did.
The first question (number 8 on the overall paper) concerned the information which would be required from his defined benefit scheme administrator in order to advise him whether to transfer his benefits. This has been asked on numerous occasions previously and the CII commented that it was well answered by most candidates. Marks have been lost previously for candidates not reading the question properly and including information that would be requested from the client, so it was good to see that the message appears to be getting home.
Question 9 asked us to explain the factors you would consider when assessing their capacity for loss. Again, whilst most candidates would be expected to have a good knowledge in this area, the difficulty may lie in coming up with enough points for what was a 10-mark answer. The CII stated that some candidates lost out due to not using information which was in the case study.
Question 10, again, was a standard recommendation one. Again, we were given a recommendation (to retain the scheme benefits) and asked to justify it. This should have been relatively straightforward given the information in the case study – Gino’s only pension, under 55, several years from retirement, good health, longevity, cautious ATR, low capacity for loss etc… Feedback was that the question was an ‘explain’ one and some candidates did not develop answers sufficiently to gain the really high marks, falling into the trap of simply stating answers.
The final question concerned life assurance and asked us to recommend a suitable life assurance policy to set up to provide protection for their financially dependent daughters. As we all know, life assurance is a possible alternative where death benefits are a driver. However, it is not something which has tended to come up as a question in its own right to date. The CII observed that most candidates performed reasonably, but some lost marks due to not providing enough detail on, for example, the basis of the cover level.
Overall, a tricky little paper, but one which was perfectly passable for those who had done their homework and/or deal with DB transfers in the course of their work.
As AF7 is a specialist paper we thought it might be useful to see what has been tested over the previous six papers starting with the first sitting in October 2019.
| October 2019 | How a triage service works including benefits for client. Factors to consider when advising whether to transfer a RAC with a GAR. Factors to consider when assessing security of scheme benefits from an underfunded scheme. How the estimated costs of providing same benefits in a DC scheme as those in a deferred DB scheme are calculated, stating assumptions used. 32 marks | Information needed from the administrator of the scheme. Factors to focus on when assessing attitude to transfer risk. Client-specific factors to be considered when undertaking APTA. The reasons why the recommendation was for client to leave benefits in the scheme. 34 marks | The benefits and drawbacks of transferring a DB scheme to a PP. Why the pre-retirement death benefits payable under the scheme don’t meet their objectives should client die before drawing benefits and the actions they could take to help meet their objectives. Following a recommendation to transfer, the factors to take account of when assessing sustainability of withdrawals needed to meet their income needs and the additional information needed to advise on a suitable investment strategy. 34 marks |
| July 2020 | FCAs rules when two advisers work together to provide advice and the advice on the proposed receiving scheme and its investments How a higher assumed rate of future inflation would impact a CETV Benefits of using a lifetime cashflow model and why it needs to be reviewed regularly Key factors, and their importance, when assessing ATR 33 marks | Factors to consider and their relevance when recommending a potential transfer Death benefit options and their tax treatment on a transfer to a PP Tax implications of using an investment portfolio to provide income / capital requirements as opposed to taking funds from a PP 34 marks | Additional information needed to advise on the suitability or otherwise of transferring a DB pension scheme to a PP Why the results of a TVC will be of limited relevance in determining whether a transfer is suitable or not Benefits and drawbacks of transferring to a PP now rather than when the client approaches age 60 How benefits will be affected if the scheme enters the PPF before age 65 33 marks |
| October 2020 | Independent advice and transfers. Criteria for ill-health pension; PPF compensation and why CETV when in poor health might be good value. Factors when transferring/GMP benefits. Reasons for higher CETV. 33 marks | Factors when transferring pre-97 benefits leaving post 97 benefits in scheme. Death benefits and taxation for post-97 benefits and DC pension following transfer of cash equivalent pre-97 benefits. Factors when designing an investment strategy for a transferred pension fund. 34 marks | Additional information needed before advising on suitability of transferring benefits. Factors to support a recommendation to retain benefits in DB scheme. Why nominations for dependent’s FAD and workplace pension should be made. IHT Planning 33 marks |
| February 2021 | Section 32 policy that included GMP. Employer covenants. Death benefits and tax treatment in the event of death before crystallisation if scheme is retained or a transfer to a PP is made. Abridged advice. 30 marks | Factors to consider when deciding which DB pension to transfer. Benefits and drawbacks of using part of a fund to buy an annuity. Factors to consider when deciding which annuity basis should be recommended for partial annuitisation. Class 3 NICs. 38 marks | Contingent charging Cash flow modelling – FCA requirements when used as part of the APTA and reviews. Risks regarding accepting a CETV, withdrawing the PCLS to repay debt with balance placed on deposit. 32 marks |
| April 2021 | Abridged advice and the process that must be followed where the initial outcome is unclear. Key factors to consider when assessing capacity for loss in respect of a safeguarded benefits transfer. RACs and guaranteed annuity rates Sustainable withdrawal rates 33 marks | Information needed regarding existing scheme when advising to transfer. Factors to consider when making a recommendation. Investment and diversification. Death benefits and nomination forms. 36 marks | Information within the one-page summary. Which pension to transfer and why. PPF compensation. 31 marks |
| September 2021 | The four drivers of vulnerability. Cash equivalent transfer value assumptions. Information provided by trustees. Scheme underfunding. 28 marks | Recommending an investment strategy for a transferred pension. PCLS vs UFPLS. Payment of class 3 NICs. 32 marks | Information required from the customer. Factors to consider when recommending. Cashflow modelling. Death benefits. 40 marks |
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