Insurers have been pulling coverage in pensions PI for a number of years, but will the FCA’s recent intervention change things?

Insurers have had concerns about the entire salary-related pension transfer advice market for a while.

Last week professional indemnity (PI) insurer – Liberty announced that it was no longer accepting new business for defined benefit (DB) pensions transfers due to the risk increasing in this area.

Incidents of pensions mis-selling have been on the rise since rules were relaxed in 2015, and many financial advisers performing a high level of DB pension transfers have reportedly seen their PI coverage cut only £500,000.

The FCA has been continuously reviewing pension transfers and last week announced that it was taking further action due to its concern over firms giving an “unacceptable standard” of advice. 

The financial watchdog released three papers in a bid to protect pension savers and retirees. It has proposed a series of measures to protect consumers transferring out of the DB pension schemes.

But after such a loss of confidence in the line, will the FCA’s actions be enough to attract insurers back and restore levels of coverage? 

No significant improvement 

Brian Boehmer, partner at Lockton, thinks not. He told Insurance Times: “Overall, the proposed changes by the FCA are not going to improve the situation significantly for insurers.

“The increase to the FOS [financial ombudsman service] awards has greatly frustrated insurers. Not only do they have to cope with the goal’s posts being moved retrospectively, insurers also have to deal with increased awards while having little ability to challenge them.

“Further, the majority of claims will fall into the first £500,000 bracket so it is unlikely that there will be any significant savings available for the reduced limit.”

Nathan Long, senior analyst at Hargreaves Lansdown, added: “It’s telling that the regulator is also focusing on people being defaulted into advice services that don’t offer value for money, as most people only really need advice at the point their finances become too complex for them.”

“Jittery underwriters” 

The FCA’s three papers include a ban on contingent charging on defined benefit transfers – where advisers only get paid if the individual goes ahead with the transfer of a pension. It will be introducing “investment pathways” for consumers entering drawdown without taking advice and an “advice-light” service so consumers are not paying full fees unless realistic circumstances can be proved.

However, Keoghs’ partner Ruth Lawrence highlighted that the financial advisers’ PI insurance sector had seen significant losses in the past, and that there were a number of factors that would continue to make underwriters “jittery”.

These include the complexity of pensions, the high values involved, and that if pension values dip, financial advisers are left in the firing line.

“The echoes from endowment mortgage scandals past are clearly audible,” she said. “If you add to this the fact that the level of exposure at this stage is very hard to gauge, one can see insurers adopting an increasingly bearish approach to this cover going forwards.

“As against that there is a demand from members of the public for advice with regard to their pension position and with appropriately worded letters of engagement and capped liability there is no reason why advice should not be given without undue risk to insurers.”

Fewer providers

But she warned that at present there would appear to be no incentive for insurers to offer this cover for their IFA clients. 

She added: “Similar difficulties are currently facing construction professionals particularly Approved Inspectors.

“The lack of available insurance to this group has led to companies going bust and the risk of building projects being halted. If IFAs are similarly unable to obtain cover the same risks apply to both the IFAs and their clients [or] consumers.”

Neil Jefferies, head of financial planning at Adroit – an IFA [independent financial adviser] which is part of the Slater and Gordon group, said the changes in pension rules would most likely see fewer financial advisers offering this specialist product.

He told Insurance Times: “While it is not in the vast majority of people’s interests to transfer out of a defined benefit pension, there will still be a minority – those wishing to retire early or access pension assets for alternative investments – who want to.

“Given that, there will continue to be some demand for specialist advice. In the new regulatory and insurance landscape, we will continue to see a reduction in the number of IFAs offering this service because it will not be financially viable.”

Good risk, bad risk 

Yet, with the situation at least now improving for PI insurers in the pensions market, Anthony Silverman, associate director in analytics at AM Best, said said there were other attractive features of the pensions market that he said would keep insurers interested.

Silverman said: “The difficulty for insurers is the challenge of separating good risks from the bad in this market right now.

“However, a trend of increasing activity around pensions savings alongside the attractiveness for insurers of maintaining and expanding their footprint in servicing a part of the intangible economy, and the positioning of this class of PI insurance within large diversified insurance portfolios means that some insurers will want to stay in close contact with the market and provide carefully structured cover at the right price.”