The dark side of pension freedom; the NAO report on the FCA and BSPS

The National Audit Office has produced what will no doubt become the definitive report on the British Steel Pension Scheme and what happened to it. It focuses on

  • how the FCA was organised to prevent, identify, and respond to unsuitable
    financial advice in the BSPS case, and how this was undertaken in practice;
  • what the FCA, FSCS, and the Financial Ombudsman have done to resolve
    detriment experienced by BSPS members who were miss-sold pensions advice,
    and to what extent compensation has been delivered;
  • and what the impact of the BSPS case has been on pension members,
    the regulatory framework and the Defined Benefit (DB) pension transfer
    advice market generally.

Gareth Davies of the NAO comments

“Although measures have been put in place aimed at improving how the pensions advice market is regulated and to attempt to remedy the financial losses suffered by British Steel Pension Scheme members, it is clear that many people have not been compensated fully under current arrangements. The BSPS case demonstrates the costs and difficulties of remedying failures in financial services and the importance of preventing problems from occurring in the first place.”

“Preventing problems from occurring in the first place”

That , five years after the event unfolded, it has needed such a report, confirms that there was a  failure not just from the FCA, but from the Pensions Regulator whose desire to protect the PPF, created the “Time to Choose”.  Plan A gone ahead and had BSPS entered the PPF assessment in 2017, it is likely that this well funded and well managed scheme would have continued to provide pensions to the thousands who transferred out.

The Regulatory Apportionment Agreement (RAA) between the various sponsors, fiduciaries and regulators ended up redundant since BSPS never went into the PPF. But while the PPF had the capacity to absorb BSPS, many members did not have the capacity to make complex choices and turned to regulated advice. The lasting consequence of the RAA is the subject of the NAO’s report – if the report has a weakness, it is in the scope it was given , that does not extend to examining how the RAA came into place and why.

The British Steel Pension Scheme and what happened to it

The Story of BSPS’ Time to Choose has been well documented but never so well as this

The British Steel Pension Scheme (BSPS) was a large DB scheme sponsored
by Tata Steel UK. In 2015-16, it had approximately 130,000 members (including
14,000 current employees, mostly located in Wales, the Midlands, Yorkshire and the
Humber region, and North-East England) and £13.3 billion of assets.

After Tata Steel experienced financial difficulty, in 2017, the BSPS was restructured.

Around this time, 7,834 members (representing £2.8 billion of the fund) chose to transfer their benefits out of the scheme to a DC pension arrangement; 95% of these decisions were informed by independent financial advisers. Subsequently, there have been concerns that these members received unsuitable advice and may have made poor financial choices and lost significant sums of money as a result

The FCA estimates that 79% of all BSPS members who received advice
transferred out of the scheme

In summer 2017, the FCA had limited insight into the DB transfer advice market and what was happening in the BSPS at the time of its restructure. The FCA did
not have any data on the number of DB transfer requests that were taking place or on the state of the adviser market in the local areas. Data on the number of BSPS
transfer requests were held by the scheme trustees and administrators, who are not FCA authorised, and the FCA was therefore not aware of the level of interest
BSPS members had in transferring out of the scheme.

Furthermore, only five out of the estimated 369 advice firms involved in the BSPS case met the FCA’s size
threshold for regular engagement with the regulator. Instead, the FCA’s approach for these smaller advisers was limited to undertaking thematic work on key issues
across the entire market and specific case work identified through intelligence

The failure here was systematic. The Trustees, the sponsor, their various advisors and the Pensions Regulator failed to pick up on the looming fiasco. But on Facebook , on this blog and in selected media (principally the FT), the signs were clear.

An anonymised post from the BSPS members pages in September 2017

Throughout the second half of 2017 it was obvious to anyone reading the Facebook pages that large numbers of steelworkers were going to transfer.

I presented to the Trustees in July 2017 , warning of this and suggesting a transfer advice helpline. I subsequently learned that the Trustees had been advised that there was no history of transfers and the guidance put in place was about choices many members never considered.

What the FCA did in response to what happened

The FCA recognised that it needed to change its approach to regulating the pensions transfer advice market. It has made changes to its internal processes in response to the BSPS case. For example, from 2018 it began collecting more
data from financial advisers to improve its market intelligence. It has changed its approach to engaging with regulatory partners, such as developing a joint protocol
to enable early intervention in DB transfer cases. The FCA also updated the qualifications it requires of advisers wishing to be approved as pension transfer specialists. To improve industry practices, in October 2020, it banned charges for advice where consumers only pay when a transfer proceeds, except in certain limited circumstances

Like the quizzical duck in the cartoon, we may wonder how the lessons of the first pension miss selling scandal from 1988-1995 were not learned. Whereas previously, restitution was to return members to the scheme from which former members had transferred, restitution to BSPS members has thus far been limited and subject to further dispute.

The compensation awarded by the FSCS is limited to £50,000 for claims against firms that failed before April 2019 and £85,000 for firms that failed after that date. The average loss for BSPS claims resolved by FSCS is £82,600, with individual cases ranging from £0 up to £489,000. The FSCS has estimated that the total loss for its upheld BSPS claims is £55.3 million, and the total compensation awarded by FSCS is £37.3 million, resulting in a shortfall of £18 million

The total cost of funding the levy, including operating costs, is expected to increase by 23% from £330 million in 2021-22 to £406 million in 2022-23. £90 million of the 2021-22 cost will be borne by the wider financial services industry

The cost of BSPS will be passed on to the wider community especially those paying for advice who may be paying the adviser and provider’s levies.

Seventy-two per cent of the Financial Ombudsman’s cases and 40% of
FSCS’s claims have been made through claims management companies or legal
representatives. BSPS has spawned a secondary industry surrounding claims that , without further intervention from Government, will see the BSPS fall-out continue for years to come.

The impact of BSPS on former members

Here is the crucial judgement of the NAO report.

A large number of BSPS members have suffered a significant degree of financial detriment after transferring out of the scheme. Whilst the total loss experienced by members is not recorded, for claims made to the FSCS the
average individual loss is £82,600. Pension scheme members were placed in a vulnerable position and the communication and support provided at the time of the
BSPS restructure was not adequate. Furthermore, the regulated advice market, which was intended to be a key protection against financial loss, failed to protect
them adequately, with 47% of advice deemed to be unsuitable.

The introduction of pension freedoms in the Pensions Schemes Act 2015 relied on a number of measures to protect consumers, such as the provision of financial advice. The FCA and HM Treasury should consider whether there
are lessons to be learned about the way they work together to identify and mitigate any risks to consumers as policy is being developed.

For the regulators  consideration of key regulatory factors, such as the strength of existing safeguards to protect consumers in the DB pension transfer process; the regulatory data needed to support proactive intervention
and the powers to collect this; and the mechanisms and approaches that can  be used to communicate key messages effectively with less accessible firms and consumers

Despite high levels of unsuitable advice, to date, only a small
proportion of these members have made a complaint through the statutory redress organisations. The FCA, the Financial Ombudsman and FSCS should reflect on their experiences in trying to reach affected consumers
to understand what worked well and what could be improved in future.

The report asks why were BSPS members vulnerable?

The conclusion is that the incentive to transfer was increased by the de-risking of BSPS required by the Pensions Regulator as part of the RAA.

The report noted that in April 2017, BSPS trustees decreased the risk of the scheme’s investment strategy before it entered the Pension Protection Fund (PPF) assessment. This reduced the discount rate applied by the actuaries and meant that BSPS transfer values increased significantly.

To this was added a further incentive to transfer, being the flexibility offered to members in how they could draw their pensions following the launch  of pension freedoms two years before Time to Choose.

It(the FCA) told us that it had limited time to prepare the DB transfer advice market for the Pensions Schemes Act 2015, to minimise risks to consumers from transferring out of a scheme. Across the entire market, the number of DB pension
members who were advised to transfer out of their pension increased by 220% between the year to September 2016 (shortly after the Act was introduced) and the year to September 2018, from 22,000 to 70,700. This number has since reduced to 20,000 by 2021, closer to levels seen before the Act was introduced

The report correctly identifies the causes of the high incidence of transfers as a result of Government backed interventions into the pensions market, both to protect the PPF and enable members the freedom to spend the wealth from transfers as they liked.

The chart shows that the timing of Time to Choose coincided with the peak of a nationwide surge in transfer activity, the majority of which was to transfer.

Cost effectiveness  of the FCA BSPS review

The NAO looks into the costs and effectiveness of the review that has so far been carried out. The FCA estimates this project and associated investigations cost around £6.7 million.

In a 2017 survey of 530 BSPS members, respondents were asked if they believed their financial adviser had acted with their best interest at heart, 91% (263 out of 288 respondents) believed they did. There was a high degree of trust in regulatory advice and that has not entirely gone away.

Despite the FCA encouraging steelworkers who have transferred to come forward and seek redress, only about half who might have a claim have so far made one. The report comments

Stakeholders have suggested that the low take-up of complaints may be due to a lack of understanding among BSPS members that they have suffered financial loss or misplaced loyalty to local advisers

What happens next?

The FCA has yet to put forward its BSPS specific restitution scheme. Indeed we await the consultation on what it should look like which is due by the end of March.

I’m sure that some steelworkers will consider putting restitution in the hands of one of the contributors to the problem, is a sick joke, but that is the way it has to be.

But the NAO report should spark more than just hand wringing at the FCA. Unlike other scandals such as the selling of mini-bonds, the pension miss-selling scandal of which BSPS was a major part was a repeat production. The regulator had been here before and the lesson of a previous scandal were not learned.

Worryingly, the FCA seems to have had no contact with tPR prior to the Time to Choose and were entirely reactive to the situation as it unfurled. This is a separate problem which has been addressed. But I continue to worry that another pensions scandal might happen because of the gap between tPR and the FCA, the most obvious worry is what is happening to the savings of millions of pension savers who have accessed their pension pots since 2015, mostly without advice or guidance. Most of the pots in question are not covered by the FCA’s Retirement Income Study as they were saved in  master trusts and other occupational schemes.

The evidence of the NAO report suggests where the FCA does not know what is happening, trouble may follow. I fear that this will not be the last time we see the dark side of the pension freedoms.








About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to The dark side of pension freedom; the NAO report on the FCA and BSPS

  1. Richard T says:

    “Like the quizzical duck in the cartoon, we may wonder how the lessons of the first pension miss selling scandal from 1988-1995 were not learned.” One reason may be that so few people were still at the FCA who had first hand experience of the earlier pensions mis-selling scandal. Staff turnover can erode corporate memory very quickly (a lesson for today, perhaps?).

    “The FCA and HM Treasury should consider whether there are lessons to be learned about the way they work together to identify and mitigate any risks to consumers as policy is being developed.” Indeed – just how much working together was there before the pensions freedoms announcement?

    And, if the FCA has to act, particularly to change its rules, no one should underestimate how long that can take, given the statutory requirements for consultation (usually three months, after the consultation paper has actually been written and gone through all the internal approval processes) and cost-benefit analysis – no matter how much the aspirations of those are at the top to be “fleet of foot”

  2. Bryn Davies says:

    My question is whether this was a one-off problem, because of some unique circumstances; or simply a graphic illustration of inherent problems that have only been exposed in this case because the sheer scale and the hard work of individuals who have stood up for the steelworkers?

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