Defined Benefit 

Fears over PI claims grow amid DB demand surge

Fears over PI claims grow amid DB demand surge

Advisers are concerned they could be sued in the future over poor advice as client demand for defined benefit pensions transfers, surges, new research from pensions provider Prudential shows.

The attraction of high transfer values for final salary schemes is putting pressure on advisers as insistent clients disagree with their recommendation.

According to the study more than 80 per cent of advisers have reported an increase in requests for advice about transferring defined benefit pensions.

Even more worrying the Prudential said that two out of five advisers (44 per cent) warned they had seen an increase in clients completing transfers despite recommendations not to.

About half of advisers with insistent clients say they have helped with the transfer after their recommendation was overruled.

As a result 39 per cent of firms are concerned about the risk of future liabilities if advice they give is contested while 17 per cent fear the cost of professional indemnity (PI) will rise.

The report also found that more than half (61 per cent) of advisers worried about the impact of defined benefit transfers are concerned about the risk to consumers if they give up a guaranteed income for life.

Stan Russell, retirement expert at Prudential, said: “Relatively high transfer values and the fact that pensions can be left as part of an inheritance are among the main reasons why clients might insist on a transfer, even if it is not in their best interests.

 “This presents financial advisers with a dilemma. The valuable benefits of a defined benefit pension should not be given up lightly because it involves transferring investment and longevity risk from the employer to employee and is irreversible once complete.”

The issue of insistent clients has been a controversial one since April 2015 when pension freedoms came into force.

Insistent clients are individuals that receive a personal recommendation but then choose to do something different than what was recommended with the help of the adviser who gave the personal recommendation.

In a move to protect firms from the fallout of insistent clients later making a complaint to the Financial Ombudsman Service or a PI claim, last month, the FCA provided further guidance on how advisers should handle insistent clients.

The action was also in response to criticisms from advisers that previous guidance was not clear enough.

Mr Russell added: “Advisers need to ensure that their clients understand the risks of a transfer and ensure it is in the best interest of clients.

“They also need to check if the scheme offers a partial transfer before proceeding with a recommendation. If a client insists on a transfer, advisers must make sure they follow the process outlined by the Regulator.”