For many years the regulator in the UK, the Financial Conduct Authority (FCA), has ramping up the introduction of legislation to make it more difficult to transfer a defined benefit pension in the UK. While the protections are welcome for UK residents who often have little to gain from a transfer out of a defined benefit scheme they are starting to have an unwelcome and profound consequence for those who live outside of the UK that can have much to gain from a transfer especially in respect of tax savings.
Transfers need FCA advice
Pension transfers may stop altogether for people whose defined benefit schemes have a transfer value in excess of GBP30,0000. Because transfers over GBP30,000 require advice to be provided by a UK based FCA regulated adviser.
FCA advisers must have insurance to give advice
In order to be able to provide this advice the FCA adviser needs professional indemnity insurance. This is a requirement of them holding their licence to operate and provide FCA regulated advice.
Insurers no longer want to insure them so they can’t provide the advice
The providers of insurance are worried, very worried. They are pulling out of the market and not providing insurance for this type of advice, in fact the professional indemnity insurance market seems to be evapourating. Without insurance the FCA advisers cannot provide advice, and no advice means no transfer.
This is what one FCA adviser that’s had to pull out of the market told us recently
“We have spent the last few weeks trying to renew our existing PI insurance and whilst we knew our existing insurer had walked away from the market, we did think we would be able to secure further PI insurance to cover defined benefit transfers and QROPS, albeit with a heavy increase in premium and excess. However, despite conversations with numerous syndicates who may still have an appetite for this business area and the few insurers remaining in the adviser PI market, late last night we were advised that our cover would not extend to defined benefit transfers and QROPS.These are exceptional times in the PI market and in essence the PI market has essentially collapsed, largely due to concerns regarding the potential aggregate exposure of defined benefit transfers – this was fuelled by the continuing compliance updates, and general negativity of the FCA within their statements regarding defined benefit transfers”.
The £6 billion hole no one wants to insure
They further 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 lead 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 hole that £6 billion is not insurable. Essentially we have no PI market left”. The Financial Times has just reported that financial advisers are turning their back on this market in droves (read more here)
We are fast approaching a situation where defined benefit transfers will become non transferrable
We have already had three providers we have used for FCA advice pull out of the market. While we still have fully insured FCA advisers that we work with at present, we note that they may not get an insurance renewal when their current insurance expires. We are concerned our clients that wish to transfer a defined benefit pension to New Zealand may not be able to in the foreseeable future.
Having reached a peak recently defined benefit transfers start to decline in value, albeit slightly…
This is all happening against a backdrop of transfer values declining in the UK, see the following article on this https://www.professionaladviser.com/news/4007958/db-transfer-values-drop-november. This means that the demand for pension transfers may increase at exactly the same time that the ability to meet the demand hits zero.
If you’re thinking about transferring your defined benefit pension we recommend that you get onto it immediately before either, FCA advice costs hit stratospheric levels to cover the massive insurance costs, transfer values fall further or you are unable to transfer these pensions at all.