31.Regulatory responsibilities for DB transfers are split between TPR and the FCA. TPR regulates occupational pension schemes and issues guidance to DB scheme trustees and managers on how to handle pension transfers. Since April 2015, people with CETVs over £30,000 must consult an independent financial adviser (IFA) when seeking a DB transfer. The scheme trustee must confirm this advice has been received and that the transfer is to a properly registered pension arrangement before executing the transfer. The FCA regulates IFAs and the investment products that they recommend to clients.
32.The FCA’s requirements of people advising on DB transfers are set out in its Handbook. An adviser must start from the assumption that a DB transfer will not be suitable. If an adviser then goes on to recommend such a transfer, the Handbook requires the adviser to produce a suitability report which explains to the client why the recommendation is suitable for them. This should fully take into account the client’s circumstances and appetite for risk. It should inform them about the loss of the safeguarded benefits offered by the DB scheme and the extent to which the benefits offered by the recommended product may fall short of this. The FCA also stipulates that pension transfer advice must be provided or checked by a qualified pension transfer specialist. Megan Butler, FCA Executive Director of Supervision, told us that this requirement is in recognition of the fact that “this advice around the transfer of pensions is perhaps the most complex piece of financial advice that is ever heard by the recipient, the client, but also provided by the adviser”.
33.The past three years have seen a boom in DB transfers. Mercer, a pensions consultancy, estimated that 220,000 DB scheme members transferred a total of £50 billion between April 2015 and May 2017. TPR estimated that 80,000 DB transfers took place in 2016–17, while Royal London estimated there were a further 120,000 in 2017–18. This increased demand for DB transfers has been driven by the April 2015 pension freedom reforms. While many people were previously required to use their DC pension pot to buy an annuity, a product with many of the hallmarks of a DB pension, they now have more flexibility. For example, a saver can take a pension as cash or gradually draw down invested funds. The tax treatment of inherited DC pots is also now more favourable. Furthermore, low interest rates act to inflate transfer values and confidence in DB schemes has been undermined by some high-profile failures of scheme sponsors.
34.The FCA has responded to the boom in DB transfer activity by reminding advisers of their responsibilities. In January 2017, prompted by concerns that advisers were not considering where clients intended to invest their transferred pension, the FCA reiterated that it was a requirement to do so. At the same time, the FCA also warned pension scheme operators of the evolving and increasingly sophisticated nature of investment scams. In June 2017 the FCA launched a consultation on how DB transfer advice should be provided to consumers, with a view to publishing a policy statement on DB transfers in the first quarter of 2018.
35.The FCA has also undertaken some limited research into the quality of DB transfer advice. In October 2017, it published findings from a review of 88 DB transfer recommendations made by a range of advice firms since October 2015. The FCA found that only 47% of them were demonstrably suitable, 17% were unsuitable and in 36% of cases it was unclear whether the recommendation was suitable. Where a transfer is rated as ‘unclear’, this is a breach of FCA rules which require firms to be able clearly demonstrate they have taken reasonable steps to ensure that a recommendation is suitable for the client. The suitability of the recommended product could only be established in 35% of cases, with 24% unsuitable and 40% unclear. The FCA found that “some firms had ‘industrialised’ their defined benefit transfer business so that they were no longer focused on their clients’ individual circumstances and needs.” The quality of advice was far lower for DB transfers than for other forms of pension advice—an earlier review found that nine tenths of broader pension accumulation and retirement income advice was suitable.
36.There was an surge in interest in transferring out of the BSPS from its closure to new accruals on 31 March 2017. Between April and September 2017, 7,000 deferred members, one in six of the total, requested CETV quotations and 700 transfers were concluded. This trend accelerated during the Time to Choose exercise. By mid December, 13,000 members, more than 30%, had asked for CETV quotations. Around 1,280 transfers had been processed and 550 were still in progress, which in total would take an estimated £760 million out of the scheme. This implied an average transfer value of over £400,000. As of 15 January, 2,054 transfers had taken place. Allan Johnston explained that transfer values were large because BSPS members tend to be long-serving and the steel industry is relatively well paid. He had signed off around 20 transfers worth over £1 million.
37.The restructuring of the BSPS took place during a period of increasing interest in DB transfers. A series of factors specific to the BSPS contributed to far greater interest among its members:
Stefan Zaitschenko said BSPS members wanted to leave the scheme because “they had been let down”, whereas with a transfer and pension freedoms, they had “total control”.
38.As we noted earlier in the chapter, the BSPS Pensions Office struggled to cope with the demand for guidance from members. Stefan Zaitschenko said the scheme had “quite rightly” concentrated on the complex and pressing task of splitting the membership and assets of the BSPS. The scheme was not, permitted to offer advice on the suitability of a DB transfer or a subsequent investment. This, however, left “a void” for members who had questions about DB transfers, but no clear means of getting answers.
39.Henry Tapper told us that “much of the trouble at Port Talbot could have been avoided if the Trustees had been more proactive”. Though the BSPS had warned of the risk of bad advice and pointed members to the FCA register of approved advisers in its standard communications, he recommended they set up a separate helpline on DB transfers. This was eventually offered in December 2017. The scheme was, however, very stretched. As part of the framework agreement between BSPS and Tata Steel, the sponsor provided additional resources to enable BSPS to recover most of the extra costs of the Time to Choose exercise. This did not, however, make provision for resources to handle demand for transfers out, which was a statutory right irrespective of the RAA. David Neilly, a Plant Process Operator in Port Talbot, said “the scheme and the financial industry simply wasn’t prepared for what has happened”.
40.We heard that IFAs in areas with high concentrations of current and former steelworkers were “inundated with requests” for DB transfer advice. Some, facing a “huge burden on the local resources”, closed their books to new business. Stefan Zaitschenko told us that it was “first-come, first-served”, and that members who did not consider a DB transfer until the Time to Choose exercise in October were turned away by advisers recommended to them. The bottleneck was exacerbated by the time constraints faced by BSPS members, who wished to have the option of considering a DB transfer before moving into either the BSPS2 or PPF. The time constraints around the process intensified the pressure on local IFA capacity and left BSPS members racing to find an IFA. Rich Caddy told us that he returned to an IFA he was not comfortable with because his preferred option had reached full capacity.
41.BSPS members were faced with a life-changing choice in a hurry. Many 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. Its members were apparently neglected by the company, Government, and TPR in their focus on the deal to keep the company going. A member communication plan sanctioned by TPR proved woefully inadequate. Against hard deadlines to choose one of two options worse than their promised pension, many members of working age were attracted to a third option. There was a surge in interest in DB transfers, seemingly unforeseen by all involved. Under pension freedoms, a transfer offered members control over a substantial sum of their own money. Foregoing a generous, indexed and secure retirement income is not, however, the right option for most people. Reputable local IFAs were overwhelmed by demand for advice. The circumstances surrounding the BSPS created perfect conditions for vultures to take advantage.
70 TPR (April 2015)
73 FCA (21 June 2017) consultation paper
76 As set out in the
77 (Megan Butler)
78 , FT Adviser, 23 June 2017
79 TPR (22 May 2017)
80 Written evidence from Steve Webb, Royal London (
81 The tax charge on unused DC pension funds bequeathed by a pensionholder who died aged 75 or over was reduced from 55% to 45% from April 2015 and then to the inheritor’s rate of income tax from April 2016. Where the pensionholder dies before reaching 75, the pension pot is inherited tax-free (as announced at para 2.65).
82 FCA (24 January 2017)
83 FCA (24 January 2017)
84 FCA (21 June 2017) consultation paper
85 FCA (3 October 2017)
86 FCA Conduct of Business Sourcebook and
87 , 21 December 2017
88 FCA (3 October 2017)
89 , FT Adviser, 31 October 2017
90 (Allan Johnston)
91 , 18 January 2018
92 (Allan Johnston)
93 (Allan Johnston)
94 (Stefan Zaitschenko)
95 Written evidence from British Steel Pension Members Group ()
96 (David Neilly)
97 (Stefan Zaitschenko)
98 (David Neilly)
99 (Stefan Zaitschenko)
100 (Allan Johnston)
101 (Stefan Zaitschenko)
102 (Stefan Zaitschenko)
104 Written evidence from Henry Tapper ()
105 (Derek Mulholland)
106 Written evidence from David Neilly ()
107 Written evidence from British Steel Pension Members Group ()
108 (Stefan Zaitschenko)
109 Written evidence from British Steel Pension Members Group ()
110 (Stefan Zaitschenko)
111 (Stefan Zaitschenko)
112 (Rich Caddy)
9 February 2018