I know that sourcing professional indemnity insurance for defined benefit pension transfers is challenging.

It’s a contentious and highly regulated area of financial advice, with potential pitfalls at every turn.

Before seeking the right professional indemnity, you have to understand the challenges.

The gilt impact and complex decisions

The complexity and long-term implications of advising clients to transfer out of a defined benefit pension scheme mean that advisers must meet stringent regulatory and professional indemnity insurance requirements.

Fortunately, in the last twelve months things have got a little easier.

As all advisers know, gilts affect defined benefit transfer values because they influence discount rates. Low gilt yields mean high cash equivalent transfer value (CETV) lump sums, and vice versa. With current gilt yields, transfer values are low so less independent financial advisers are advising clients to transfer funds – rightly so – unless their client has a terminal illness.

But the inverse relationship is also true, and those clients who transferred out of the scheme three to four years ago, when CETV values were extremely high, received a huge transfer value.

In theory, those huge transfer values reduce the likelihood of a financial loss for the client, even if the Financial Ombudsman Service (FOS) or Financial Conduct Authority (FCA) can demonstrate that the advice to transfer out was flawed.

If there is no financial loss, it’s unlikely to result in a compensation award, regardless of the suitability of advice.

Minimum standards

Regardless, the FCA requires all regulated firms to hold professional indemnity insurance that meets its minimum standards – especially where defined benefit transfer advice is concerned – or hold significant value of additional capital.

Why are there such strict minimum standards you might ask, here’s why.

Defined benefit transfer decisions have long-term and irreversible implications; there is the potential for significant client loss if advice is unsuitable; and there’s a history of compensation claims relating to defined benefit pension transfers.