What is the real cost of defined benefit transfer advice?

With the FCA’s policy statement on pension transfer advice this year (PS20/06) in response to the consultation paper (CP19/25) from 2019, the question for many firms regarding the giving of pension transfer advice on defined benefit transfers is, ‘is this still economically viable?’ The question is likely to be different depending on the size and type of firm. To a smaller independent holistic firm, the question may be ‘can I retain my clients and keep them happy if I can no longer advise on an important area of their pension assets?’ The question for larger firms and networks may be more fundamental, ‘does giving this advice still make economic sense?’ If the numbers don’t add up or there is a risk that PI will become ‘unaffordable’ or worse still ‘unavailable’, it is likely that a firm will make a choice to withdraw their permissions as a short term solution, what then is the cost-benefit analysis of this decision?

The question may be, ‘is it prudent to give up pension transfer permissions or to continue generating any amount of income in this area of advice to fund the cost of potential liabilities arising from the advice?’ (I recognise at this point that many are probably thinking that this is easier said than done). I understand it is in most cases going to be far simpler to withdraw from this area of advice, however if it is feasible to retain your permissions, the next question would naturally be, ‘will income generated under the new rules be sufficient, and what level of demand is likely to remain in the absence of contingent charging? It is expected that many who may have previously sought the advice may now perceive it to be too expensive.

For firms who have historically given advice on defined benefit transfers, there will still be a cost to your firm, even if you voluntarily withdraw permissions. In terms of PI there are two options here, give up your permissions and get full cover for the past advice at higher premium, or accept an exclusion on your policy with a lower premium and any liabilities which arise will be funded by your firm’s assets.

Here in lies the crux of the argument for those making decisions about purchasing PI insurance. The fact is many firms are choosing to remain self-insured, some are given no choice due to the dearth of insurer appetite in this market presently, and whether your firm is the former or the later, without significant capital resources, the outcome in the event of claims for unsuitable advice may well be default.

Do you believe that retaining this exposure on your balance sheet in a bid to reduce your premium is an acceptable trade-off? The FCA shouldn’t, and if the value of a claim exceeds your firms ability to fund it, the FSCS won’t.

When an insurer makes an offer of insurance with an exclusion or a limitation for defined benefit transfers, they are not acting outside of the regulations as they currently stand, but they are not necessarily acting in your firms best interests, and if your broker isn’t explaining this to you then you might be better served taking alternative advice.

Tim Little, 7 December 2020