Professional indemnity (PI) insurance is designed as a safety net for professionals and businesses whose mistakes have resulted in a loss of client data, assets, or cash. It can be used to cover the legal costs of defending claims and, if a claimant is successful, it may also be payable as compensation. PI insurance is not a mandatory requirement for all sectors, but it provides a safety net for businesses that are responsible for cash or asset values of significantly high sums. This is subject to payable premiums that vary based on a range of factors including the likelihood of negligence, which is bad news for independent financial advisers (IFAs) offering advice on final salary pension transfers.
PI insurers have hiked their insurance premiums for IFAs conducting final salary pension transfer business, following a series of transfer scandals that have left thousands of pensioners out of pocket.
Tide Turns on Final Salary Pension Transfers
The Financial Conduct Authority (FCA) has repeatedly asserted that final salary pension transfers are rarely in the best interests of clients. That has not stopped IFAs across the UK encouraging pension holders with increasingly rare defined benefit (DB) pension schemes to transfer their retirement savings into alternative self-invested schemes that seldom match the benefits offered by the original plan. In fact, the FCA released the astonishing fact that an average of 50% of pension transfers were clearly unsuitable for clients.
After years of rife final salary pension transfer mis-selling, the tide appears to be turning against negligent IFAs. Numerous advisory firms responsible for conducting British Steel Pension Scheme transfers have been forced into liquidation, while financial experts believe that final salary pension transfers could finally be reaching peak activity.
The change to PI insurance has made it more expensive for IFAs to protect themselves against compensation claims. David Philips, the director of Wealth Design connected the changing market conditions with the British Steel Pension Scheme, claiming:
“We are, however, aware of a hardening market with regards to firms with DB permissions. The market seems spooked by the Tata Steel saga and has effectively made an impact on securing favourable premiums.”
LEBC’s director of public policy delved further into this point, laying the blame for increased PI premiums on IFAs that conducted final salary pension transfers in a highly-targeted manner:
“However, they [insurers] do have an issue with firms that go out of their way to find clients to advise on transfers and have no previous relationship with these clients. Firms that are factory-gating, like the case of those involved with British Steel.”
It remains to be seen how broadly this will impact the pension market, with IFAs already discussing the best options for securing favourable premiums for PI insurance.
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