Defined Benefit 

Who will pick up the bill if DB transfers turn sour?

Who will pick up the bill if DB transfers turn sour?

The sky-high demand for pension transfers has everyone in the industry talking about the potential risk of future claims against advisers. What impact is this having on professional indemnity (PI) insurers?

Rob Morris, partner at law firm Reynolds Porter Chamberlain (RPC), said: “It is fair to say insurers are cautious about DB transfers. We have been talking to insurers about the fact that, yes, there has been a big increase in pensions transfers from DB schemes.”

There are about 10 PI insurers, but experts warn regulatory changes could trigger a reduction. Advisers are already finding it difficult to get affordable renewal terms.

This has largely been driven by the changing FCA rules and the raft of reviews launched into the advice market, including one into DB transfers.

In the FCA’s defence, it has had to launch these reviews following the introduction of pension freedoms, which was thrust upon the market by the government.

Mr Morris, who has been handling adviser negligence claims for more than 10 years, said: “Pension transfers and pension freedoms have always been a difficult area. A pension tends to be most people’s biggest asset outside their residential home. There is a lot of money at stake. If anything goes wrong the consequence in financial terms is fairly significant.”

The situation has also not been helped by the number of adviser firms the FCA has stopped from doing pension transfers.

Key Points

  • Insurers are worried about complaints on advice on pension transfers.
  • Any attempt to push liability onto PI insurers will push advisers' bills up.
  • Insurers are worried about initiatives on minimum standards.

Julian Brincat, IFA practice head at insurance broker Protean Risk, said: “All insurers look closely at DB transfer activities.  Having seen a huge increase in numbers since the introduction of pension freedoms, there are concerns about the potential effect of a future FCA thematic review”

While there has been talk about an increase in negligence claims over the years, firms such as RPC have seen a reduction.

Anecdotally speaking, Mr Morris said RPC has been told that complaint notifications to some of its insurer clients have come down by about 30 per cent over the past two years.

As a result of the retail distribution review (RDR) firms have increased their level of professionalism and compliance, Mr Morris said. However, he warned that the trend is likely to swing the other way in the future as possible claims arise out of DB transfers.

He said: “Every year the government comes up with new rules on how much you can pay into a pension. No one knows how pensions will be taxed in the future. You never quite know what is going to happen in the next few years, let alone for a long-term investment like a pension.

“It is complicated and difficult, so it does give rise to claims. Realistically, you might see some claims in five years plus, before potential consequences of all this really plays out.”

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