Pension transfer redress rules to push up PI premiums

Pension transfer redress rules to push up PI premiums

Financial advisers may be forced to pay higher professional indemnity insurance premiums as a result of proposed changes to defined benefit pension transfer redress calculations, a DB expert has warned.

This could put added pressure on defined benefit (DB) transfer specialist advisers, who are already facing rising professional indemnity (PI) insurance premiums.

The proposed rules, announced by the Financial Conduct Authority today (10 March), apply to consumers who were given unsuitable advice to transfer out of a DB pension scheme.

The calculation methodology would be updated to take into account current inflation projections, increased longevity, and the likelihood that consumers would take a tax-free lump sum.

It would also update the pre-retirement discount rate so that it acknowledges the Pension Protection Fund exists.

Overall, the new methodology would significantly increase the value of benefits - by between 5 per cent and 20 per cent on the current methodology, according to the FCA's modelling.

John Broome-Saunders, actuarial director at pensions consultancy Broadstone, said this would have a logical flow-on to PI premiums.

Mr Broome-Saunders said: "The larger the value of the benefit, the larger the compensation has to be. Logic would then dictate that the insurance against the cost of these payments is also going to go up."

Ultimately, he said this could result in an increased "general wariness" among advisers of giving DB transfer advice.

However, he added that improved advice standards in this area may mean professional indemnity insurers do not have to increase premiums overall.

Andrew Pennie, marketing director at Intelligent Pensions, agreed that if the final compensation calculation decided on by the regulator pushes the value of DB benefits up then it would have "implications" on PI insurance.

He added, though, that the FCA's paper was putting the "cart before the horse", because the regulator was also planning to update transfer value analysis, or TVAS, calculations later in the year.

"If they're going to change the TVAS calculations, that should really be done before making changes to redress calculations," he said, adding the two were directly connected.

Overall, Mr Pennie said it was appropriate for the FCA to bring redress calculations in line with current economic realities.

Jon Hatchett, head of corporate consulting at Hymans Robertson, welcomed the FCA's proposals, saying members of DB schemes needed more protection as the popularity of final salary pension scheme transfers increased. 

"Twice as many people transferred in the first year following the introduction of pension freedoms," he said. 

"Momentum is increasing due to record high transfer values making DB transfers more attractive - both to members and to scammers. Many of those transferring won’t have had appropriate support and advice which is worrying.

"Whether individuals stay or leave the scheme, there are huge risks members could make poor decisions with a life-changing and life-long impact."

The methodology was originally created to deal with the barrage of complaints from the pension review of the 1990s.