Summary
Unsuitable advice
During our ongoing inquiry into pension freedom and choice we received worrying evidence regarding financial advice provided to members of the British Steel Pension Scheme (BSPS). BSPS members have, over the past year, been exploited for cynical personal gain by dubious financial advisers in tandem with parasitical so-called “introducers”. Steelworkers yet to reach pension age were encouraged to transfer their defined benefit pension rights into a defined contribution pension, known as a DB transfer. Anyone intending to take a DB transfer with a value over £30,000 is required to take financial advice. This is because, despite the attractive sums on offer (the average BSPS transfer value taken out was £400,000), a DB transfer is not usually in someone’s interests. It means giving up generous, indexed and stable benefits in favour of a riskier investment. Many BSPS members were shamelessly bamboozled into signing up to ongoing adviser fees and unsuitable funds characterised by high investment risk, high management charges and punitive exit fees.
Unsuitable advice on DB transfers is not confined to BSPS members. Research by the Financial Conduct Authority (FCA), which regulates advisers, shows that only half of such advice nationwide meets its standards. Yet over 100,000 people a year are taking DB transfers on the back of this advice. Another major misselling scandal is already erupting and we therefore call on the relevant bodies to treat this as such and take urgent action. A key driver of poor advice is contingent charging. Genuine independence is not compatible with a charging model that only rewards advisers for recommending a particular course of action. We recommend a ban on contingent charging for DB transfer advice.
Too little, too late
Since our inquiries into BSPS began, the FCA has gradually picked off firms which were providing unsuitable advice to BSPS members. It has also announced it is conducting a review of information from all UK firms providing DB transfer advice. This is welcome, but it is too little, too late for BSPS members. Though a surge in interest in DB transfers began in April 2017, the FCA did not begin acting until November, by which stage BSPS members were facing a pressing deadline to choose their preferred pension option. This was partly a problem of co-ordination with the BSPS trustees and the Pensions Regulator (TPR), who are responsible for DB schemes. Given they were aware of problems with DB transfer advice, however, the FCA should have been ready to intervene earlier to protect BSPS members against unsuitable advice. It needs an online register of financial advisers that a non-specialist can use. It should also abandon its June 2017 proposal to drop the safeguard of requiring advisers to start from the presumption that a DB transfer is a bad idea for their client. In the light of the BSPS experience it looks reckless.
Confusion and mistrust
The outlines of a deal to save the sponsoring employer of the BSPS, Tata Steel UK, have been in place since May 2017. The scheme’s members were apparently neglected by the signatories: the company, the Government and TPR. Between October and December 2017, they were asked to make a choice between two pension schemes which offered inferior benefits to the BSPS: the Pension Protection Fund (PPF) or a new scheme, BSPS2. Many members had lost trust in the sponsor company and its pension pledges. The scheme was under-resourced and unable to provide basic facts to inform a complex choice. A member communication plan proved woefully inadequate. It was the responsibility of TPR, who oversee trustees and signed off the RAA, to monitor the situation and ensure that members were not left in the dark. All this failed. Instead, faced with making a life-changing choice in a hurry, many members were attracted to a third option of a DB transfer. This was seemingly unforeseen by all those bodies with a duty to watch and act. Under pension freedoms, a transfer offered members control over a substantial sum of their own money. Reputable local IFAs were overwhelmed by demand for advice. The circumstances surrounding the BSPS created perfect conditions for vultures to take advantage.
Around 25,000 BSPS members did not choose between BSPS2 and the PPF, including many very elderly or ill pensioners. They will default irreversibly into the PPF, which for many will be the worse option. The Government considered a system of deemed consent, which would have ensured that those members unequivocally better off in BSPS2 would have been moved there if they did not respond, but opted against it. Deemed consent would have resulted in better outcomes for pensioners and freed administrative resources to support members for whom the decision was less clear-cut. We recommend the Government draw on the BSPS experience and ensure that a legislative framework to enable deemed consent is in place for similar future deals. We also recommend TPR require all DB schemes to be able to calculate what each member’s benefits would be under both statutory minimum indexation and PPF compensation rules. Members should expect to know what they are being asked to choose between.
Conclusion
The UK steel industry has been in long-term decline, and Tata Steel UK had become a large pension scheme with a shrinking company attached. The deal to maintain steel production in Port Talbot is very welcome. The outlines of that deal have been in place since May 2017. That ought to have been more than enough time to ensure that scheme members were supported adequately in the decisions they would need to make. They have been let down by all involved, and a minority have been exploited by opportunists. They can quite reasonably feel a sense of betrayal. There may well be similar deals involving other companies in future. Scheme sponsors, trustees, regulators and government—all culpable in this case—must ensure that the same mistakes are not made again.
9 February 2018