Defined BenefitSep 13 2017

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

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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.

Realistically, you might see some [DB transfer] claims in five years plus, before the potential consequences of all this really plays out

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.”

Another factor worrying insurers is the view that Financial Ombudsman Service (Fos) decisions often swing in the favour of the complainant.

James Wickes, partner at RPC, said: “Most advisers in my experience say the Fos is too consumer friendly, but the Fos would say its stats suggest it is not. The real problems with insurance companies is, in most cases, firms will accept the Fos determination and will comply with it. But there is a problem when the Fos in the firm’s opinion genuinely gets something wrong. It is very hard if not impossible to challenge it.”

Martin Greenwood, chief executive of Tenet Group, said: “The single biggest issue to advisers is the lack of consistency in decisions made by the Fos.”

There is also the lack of a long-stop.

Amid insurer uncertainty, the FSCS consultation outcome and PI review could turn the market on its head.

Mr Wickes said: “Adviser firms have to pay for the FSCS funding through the levy, but if more liabilities are shifted to insurers, the only consequence of that is that premiums for policies would increase.

“The idea you would be able to reduce the exposure of the FSCS by reducing the FSCS levy while shifting liabilities to insurers – the idea that you will actually save the industry money – is nonsense. It will shift where the money goes to and, instead of paying to the FSCS, firms will find they have to pay more for their insurance claims.”

If you add to this mix the potential for the FCA to reintroduce mandatory terms to advisers’ PI cover, this could spark further insurer withdrawals.

Back in 2003, the FSA removed minimum terms for advisers’ PI cover, after premiums went up sharply and insurance availability reduced. To prevent a repeat, brokers, lawyers and advisers are urging the regulator to carefully consider the ramifications of any decision it makes.

Despite their misgivings, it is not yet all doom and gloom. There are still carriers in the market, albeit cautious ones.

Additionally, there have been entrants to the market, such as Generali.

Tim Little, head of financial lines at Generali, said despite the trend from insurers to withdraw from what looks like a difficult market, he believes the insurer can help advisers.

He added that advisers are among the most open when it comes to providing information to insurers because of how challenged the market is.

Mr Little said: “Year on year advisers do not know if they will have to shut their offices because they don’t know if they will get cover. We have come into the market at a time when we have seen a real opportunity because there has been a real withdrawal from the market. We do not carry the legacy [of back books] so it is an opportunity for us.”

However, he also stressed the insurer will not write business for the sake of volume. The company will still look at each potential PI cover on a case-by-case basis.

Mr Little reiterated that the biggest worry from the PI review is the implications of any minimum standards the regulator introduces. If the FCA wants to strike the right balance, it has a job on its hands.

Ima Jackson-Obot is features writer at Financial Adviser