Financial advisers are being forced to turn away clients who want to transfer out of final salary-style pensions as they can no longer obtain adequate insurance cover, a leading professional body has claimed.
The Personal Finance Society said the soaring cost of premiums and restrictions on the level of cover meant advisory firms could be “pushed into bankruptcy by a single compensation claim” from a client in future.
“The number of advisers [prepared to advise on a transfer] are reducing daily,” said Keith Richards, chief executive of the Personal Finance Society (PFS), adding that this was “limiting the public’s ability” to transfer out of defined benefit pensions.
“In some instances, customers are saying ‘You’re the sixth adviser I’ve tried’. Financial advisers who have never had a single complaint made against them are being frozen out of the defined benefit pension transfer market.”
Consumers seeking to cash in a DB pension valued at more than £30,000 are required to obtain independent advice from a regulated pension transfer specialist adviser. However, the financial regulator has expressed serious concerns over the number of transfer requests advisers are recommending.
The Financial Times last month revealed that the Financial Conduct Authority had written to more than 1,800 advisory firms about “potential harm” in their pensions transfer advice that could give rise to future mis-selling claims.
The PFS has been collecting evidence from its membership of almost 40,000 financial advisers and has raised concerns with the City watchdog and the Treasury about how effectively the market is operating.
One PFS member reported that his firm’s professional indemnity cover had risen from £22,736 in 2017 to £112,000 a year later.
Another member running an advisory business in Scotland reported a “threefold increase” in premiums in January, plus much higher excess payments for any future claims relating to DB transfers.
Despite the increased costs, the level of insurance cover had been reduced to £160,000 for future compensation claims, and not the full amount awarded to consumers who successfully make a claim via the Financial Ombudsman Service — meaning the firm would be liable for the difference.
The PFS said the problems were being compounded by the “shrinking number” of insurers prepared to offer professional indemnity cover to firms advising on pension transfers, which meant advisers faced “a growing barrage of questions to obtain cover and massive delays in receiving quotes”.
While some independent financial advisers have opted to quit the transfer market altogether, others have tried to pass on the increased costs to customers.
The FCA and the Treasury declined to comment.
Since 2015, about 390,000 DB pension transfers have taken place, totalling an estimated £80bn, according to Mercer, the actuarial consultants.