The UK regulator, the UK Financial Conduct Authority (FCA) in 2016 made it compulsory if you are transferring a Defined Benefit (DB) scheme and it has a transfer value 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.

The problem

It has become harder for FCA regulated advisers providing reports on DB schemes to provide advice. In many cases they cannot get PI insurance as many insurers offering this cover withdrew from the market. The main FCA regulated adviser Lyfords used prior June 2020 stated: 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 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 £6billion is not insurable. Essentially we have no PI cover left”. UK Defined Benefit schemes had an overall deficit of £203.4bn at 31 March 2020, compared to £159.2bn 12 months earlier, according to The UK Pensions Regulator. Only 16% of the 5,334 Defined Benefit schemes in the UK had funding levels of 100%, down from 21% in 2019.

The solution

Last year our main FCA regulated adviser was unable to get PI cover and withdrew giving advice. We then looked around for other companies offering this advice. We were staggered at the fees they would charge and how few were offering this service. We have been able to find a FCA regulated adviser offering the required reports on DB schemes. We have negotiated a very competitive fee for this advice for our clients. We would not be surprised 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 increases. We recommend transferring your defined benefit now, in future it may not be possible as FCA regulated advisers fees increase due to increases in PI cover, transfer values fall or you are simply unable to transfer your DB scheme.

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