Defined benefit pension transfer cover restriction clause
Advisers are well aware that the professional indemnity (PI) insurance market is somewhat broken when it comes to defined benefit (DB) transfer advice, but even we were surprised last month.
I will refrain from naming names, but a certain insurer has started to ramp up the restriction clauses it places on firms that are either still active in the DB market or are requiring cover for previous business.
Here is a brief breakdown of the restrictions. Cover will not be provided if:
- advice is or was given to active members of a DB pension scheme;
- the underlying investments are not specified at the time of the advice or were considered in the transfer advice;
- the advice was based wholly on generic objectives, or the firm did not record the client’s objectives, future income needs, other investment and pension funds, or attitude to risk;
- the client was introduced by a third party, with the intention of the client investing in the introducing entity’s or connected party’s investment solutions;
- the client was more than five years away from their anticipated retirement date and less than 50 years of age at the time of the transfer (other than serious ill health cases or partial transfer, where alternative options have been explored, documented and explained to the client or the client demonstrably has no need for any income from the scheme);
- the intention is to improve death benefits, and alternative options have not been explored, documented and explained to the client;
- the use of cashflow modelling or a record of the client’s specific anticipated (as opposed to current) income needs and objectives in retirement have not been recorded;
- the advice is given without obtaining sufficient information about the client’s attitude to pension benefit-risk, attitude to investment risk and longevity risk;
- the transfer took place on an insistent client basis.
Pretty punchy, right?
Old advice, new rules
While I like to think the quality of the work we currently see in this space is a far cry from the situations that prompted these restriction clauses, it does make me wonder which older cases would – and may still – be caught out by them now.
After all, the restrictions are not limited to future business. They apply to all DB advice a firm has ever provided.
We regularly hear of rulings by the Financial Ombudsman Service (FOS) that involve advice provided under a previous version of the rules, but that does not stop the situation being assessed with today’s rules.
That can be a challenge, not least because you might not be covered if a FOS ruling goes against you.
With the level of capital adequacy, many firms are now required to hold, few would survive even a couple of claims relating to their historical DB advice.
That, in turn, leads to the Financial Services Compensation Scheme picking up the pieces again.
I raise all this because not all firms are aware of the nuances within their policies or where limits are being applied to certain types of business.
Often, the small print is at the back of the policy document (the restrictions mentioned earlier were on pages 25 and 26 of a 28-page pack).
In that environment, you have to ask what the obligations should be of insurers to make this as clear as possible at the beginning of a policy, and alongside the cover details.
We appreciate the position that PI insurers are in with regards to covering claims as they arise. But there does now need to be some further regulation from the FCA about the different types of cover offered, how they are documented, and what is acceptable when it comes to restrictions, exclusions and policy excesses.
We regularly speak to PI insurers and brokers about how we can work closely to improve things for firms, and I am part of a working group trying to bring insurers, compliance experts, the FCA and the FOS together to improve the standard of advice given, as well as the PI market that insures it.
That said, I believe the rules need to be expanded to ensure advisers get a minimum standard from their insurers, too.