In 2016 the UK Financial Conduct Authority (FCA) made it compulsory when transferring a Defined Benefit scheme with a transfer value of over £30,000 to obtain advice from a FCA regulated adviser prior to transfer. In order to give this advice the FCA adviser needs to have professional indemnity (PI) insurance.
According to the UK Pensions Regulator at 31 March 2020 UK Defined Benefit schemes had an overall deficit of £203.4bn, compared to £159.2bn 12 months earlier. Only 16% of the 5,334 Defined Benefit schemes in the UK had funding levels of 100%, down from 21% in 2019.
It has become harder for FCA regulated advisers providing reports on Defined Benefit (Final Salary) schemes to provide advice. In many cases advisers cannot get PI insurance. Many PI insurers offering this cover withdrew from the market. It is not unusual to hear of adviser firms facing PI insurance bills that are 2-3 times higher.
Our main FCA regulated adviser used prior to June 2020 emailed:
“This started with the ombudsman limit increases – followed by the CP19/25 consultation paper, coupled with generalised statements that in the opinion of the FCA; £2.2b had been transferred annually since 2015 – of which, given the snap shot that the FCA had taken, 60% of the transfers may have been the wrong advice. This consultation now appears to have been ramped up as the FCA issues 1,700+ follow up letters. This has led them to the conclusion that they (PI insurers) are potentially exposed to the tune of £6 billion aggregate limit. It is therefore not surprising that no insurer is willing to underwrite financial advisers at any cost. Whilst in the past we have managed to obtain underwriting by demonstrating we are suitably knowledgeable and compliant within our processes – the simple matter underpins the whole that £6 billion is not insurable. Essentially we have no PI cover left”.
Following withdrawal from the market by the FCA adviser that we were using we searched for other companies offering this advice. We were staggered at the fees that are being charged and how few companies were offering this service.
Lyfords has been able to find a FCA regulated adviser offering the required reports on Defined Benefit schemes. We have negotiated a very competitive fee for this advice for our clients.
It would not be a surprise if these fees increase as fewer advisers are offering this service. PI insurers are increasing premiums or withdrawing from the market, and demand for this required advice has increased.
We recommend transferring your Defined Benefit pension now, in future it may not be possible as FCA regulated advisers fees increase due to increases in PI cover, transfer values fall as interest rates rise, or you are simply unable to transfer your Defined Benefit scheme.