Hard pressed trustees of defined benefit schemes are facing huge rises in their liability insurance premiums, with the cost of dealing with claims and upcoming new legislation driving insurers to double premiums in some cases.

To avoid being left facing personal bankruptcy if a complaint is successful, trustees have been recurring to pension liability insurance policies for more than 20 years.

With two types available in the market — policies that provide cover in relation to an active plan and specific insurance for pension schemes that are going to be, or have been, wound up — insurers protect trustees and schemes against third-party claims alleging financial loss.

Only a few insurers, such as Chubb, Axis/OPDU, AIG, Munich Re, XL, Hartford and Nexus remain in the market.

This means larger schemes need to secure “layers” of cover with different providers to arrive at a meaningful level of protection for their schemes, compared with the size of the liabilities.

PwC suggests that a budget of between £500 and £750,000 for a £500m pension scheme is needed for “some element of lifetime cover, and multiple policies to cover up to £50m of liability”, while Universal Legal Protection estimates £10,000 would give £1m of cover over six years to a small scheme.

Jane Kola commented:

“Trustees are unlikely to be found liable to pay someone a benefit if a mistake has been made, as long as the rules contain good quality trustee protections”.

Read Jane’s comments in Pensions Expert.