The CII AF7 March 2023 Exam in Review
We’re looking at the question paper from the CII’s March 2023 sitting of AF7 – the Pension Transfer exam.
This article is correct as at 13 May 2023.
You can find the question paper here.
In this paper, Section A had 34 marks allocated to it, and Section B had 68 marks.
Section A involved the usual four questions for a total of 34 marks. Question 1 was the usual regulatory question and covered the FCA’s ban on contingent charging other than for clients who are in poor health and/or serious financial difficulty. First, we were asked to define serious financial difficulty and secondly to outline the three examples provided by the FCA of what would not be considered acceptable to meet the ‘serious financial difficulty’ definition. Contingent charging has been questioned before in AF7, however, not in this exact manner. Answering successfully would have required a good knowledge of COBS 19.1 and/or recent FCA consultation papers. We can file this question in the tray marked ‘tricky’ for 8 marks.
In Question 2, we were asked a twofold question. Firstly, we were asked for the key stages in the calculation of a cash equivalent transfer value. This was fairly straightforward and well-prepared candidates should have been able to score 5 or the full 6 marks on it. We were then asked for 6 situations where a DB scheme member does not have a statutory right to transfer. This, again, falls into the ‘tricky’ category, for 6 marks, though there are several immediately obvious answers (the member is within 12 months of NRA, the scheme is an unfunded public sector one, the scheme has been taken into the PPF…)
Question 3 covered Olive, whose scheme was underfunded, but whose transfer value had not been reduced due to the strength of her employer covenant. The question asked us to explain what is meant by an employer covenant and its significance in respect of the decision not to reduce the CETV. Employer covenants are a relatively complicated area, but have been tested previously in AF7 and those who had done their homework should have been able to pick up a few marks at least.
In Question 4, we were introduced to Sabrina, who was considering a defined benefit transfer and asked to explain what is meant by sequencing risk and four strategies which could be used to mitigate its potential impact. Any good pension adviser should have a good understanding of what sequencing risk is, however, the second part was not so straightforward. Overall, not the easiest of section A’s, but the well-prepared should have been able to score at least reasonably.
Case Study 1
Case Study 1 introduced us to Hana, aged 60 and in a civil partnership with Niki, who suffers from high cholesterol and heart disease. This was a relatively lengthy case study. In Question 5, we were asked to explain why Hana’s objectives in terms of ensuring that their objectives in terms of death benefits on first death (a 30% reduced income) could be met if they transfer Niki’s scheme.
This required some basic number crunching when comparing their current and 30% reduced income needs with the 66.67% dependents pension from Hana’s scheme and full state pension entitlements respectively. Basically, if they took Hana’s scheme pension without tax-free cash then even allowing for the early retirement reduction, the 66.67% dependent’s pension could meet the reduced income need in full in the event of her first death.
Question 6 asked us to outline the reasons for transferring Niki’s scheme rather than Hana’s (excluding death benefit requirements). This is a question type which has come up on several previous occasions during the AF7 exam and which is likely to pop up in real-life scenarios as well. The FCA has previously stated that where multiple DB schemes are available, firms ought to consider whether needs could be met by simply transferring one of them and it is therefore important to be able to make a recommendation in respect of which would be considered more appropriate. This was for 12 marks and well-prepared candidates should have been able to score well.
In Question 7, we were asked about five benefits and five limitations of cashflow modelling. This type of question has come up several times previously, not just in AF7 but in other pension and general financial planning exams. Again, those who have done their homework in terms of past papers should have been able to score well, though sometimes it can be hard to think of the number of points the CII require and resist the urge to regurgitate and reword similar points.
Question 8 was a fact-finding one and concerned the additional information we would require to advise Niki on a suitable investment strategy. The underlying investments are an essential part of defined benefit transfer advice and the FCA expects advisers to know where their client’s funds will be invested as part of giving the advice. Fact-finding questions and investment questions are a regular part of AF7, though we do not usually see them as part of the same question and finding 7 points may have proved tricky for some.
Case Study 2
The second case study question introduced Surita, aged 56 and married to Juan aged 64. Each had two children from previous marriages and unfortunately, she had been diagnosed with multiple sclerosis and had to stop work on health grounds.
Question 9 asked what further information we would require from the administrator of Surita’s defined benefit scheme before making a recommendation as to whether to transfer her benefits. This type of question is classic AF7 and has been asked several times previously. It is unusual to see two fact-finding questions one after the other, however, fact-finding questions regarding the scheme itself are much more common and for eight marks, good scores should have been available.
Question 10 was another regular one, requiring a consideration of the factors we would consider when assessing the suitability of Surita’s transferring her scheme benefits. Interestingly, the CII felt the need to remind candidates to use the information in the case study as opposed to simply listing generic points. There was quite enough of it to pick up the majority of the significant 15 marks on offer. The main points being her poor health/reduced life expectancy, ability to take PCLS and repay debts, reducing ongoing expenditure, apparent affordability of using drawdown to meet expenditure until his state pension comes into payment, ability to any residual funds to the children on Juan’s death etc…
We finished off with a question on spousal bypass trusts. This, again, has been tested previously in AF7 and other pension exams and is still very relevant in family situations where there are children from previous marriages. This might be termed an ‘occasional’ question – those very well prepared could have picked up good marks. However, given that it is not one that is used often, candidates with limited study time could have been forgiven for not being up to speed on it.
Overall, this was a tough little paper, with a number of less-regular areas being tested, though it should have been possible to pick up some good marks on the larger case study questions.
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 sitting in February 2021.
|Section 32 policy that included GMP.
Death benefits and tax treatment in the event of death before crystallisation if scheme is retained or a transfer to a PP is made.
|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.
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.
|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
|Information needed regarding existing scheme when advising to transfer.
Factors to consider when making a recommendation.
Investment and diversification.
Death benefits and nomination forms.
|Information within the one-page summary.
Which pension to transfer and why.
|The four drivers of vulnerability.
Cash equivalent transfer value assumptions.
Information provided by trustees.
|Recommending an investment strategy for a transferred pension.
PCLS vs UFPLS.
Payment of class 3 NICs.
|Information required from the customer.
Factors to consider when recommending.
|Personalised charges communications
|Transfer value comparator
Death benefits and tax treatment
|Additional information from the administrator
Capacity for loss
Reasons for a retain recommendation
Life assurance to cover death benefits
|Steps in the transfer process
Security of scheme benefits
Reasons for CETV increase
|Additional information re: circumstances
Class 3 NICs
|Benefits and drawbacks of transfer
Guaranteed annuity rates
Risks of transfer
Transfers and IHT
|Ill health early retirement
Reasons not to transfer
|Additional information from the scheme
Capacity for loss
Reasons for transfer
We offer resources to support you as you revise for the AF7 Pension Transfers exam. AF7 has a large number of ‘staple questions’ which come up time and again in the exam paper.
Our ‘Core Knowledge’ resource focuses on these ‘staple questions’ and includes questions, answers, detailed explanations, and cross-references to the CII study text. The resource also includes some of the core calculation questions you would be expected to understand. This is a resource that we developed specifically for the AF7 exam.
Grab the resources you need!
If you’re studying for your CII AF7 exam, and you’re wanting to feel confident on exam day, grab our free taster to try out one of Brand Financial Training’s resources for yourself. Click the link to download the AF7 Core Knowledge Taster now!