After a mis-selling scandal that led 2,600 British Steel Pension Scheme (BSPS) members to move £1.1 billion ($1.5 billion) worth of their savings into risky funds with high management fees, the Work and Pensions Select Committee members published a report urging for the proper authorities to take action.
“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,’” the report summary reads.
“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… 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.”
The committee then said that anyone intending to transfer more than £30,000 of their benefits is required to take financial advice as it is not in a person’s best interests due to the stability they leave behind in doing so.
While the report does not know the full scale of the issue, it suggests billions of pounds could be lost. In addition, the report notes that research by the Financial Conduct Authority found that only half of defined benefit transfer advice meets the required standards. Despite the subpar advice, more than 100,000 people are taking these high-risk transfers. According to The Independent, financial data firm Mintel estimated 250,000 transfers moved around £15 billion ($21 billion) worth of benefits in 2017.
According to the report, the average BSPS member transferred £400,000 ($561,859) worth of benefits, 20 of which moved more than £1 million ($1.4 million).
Although the committee welcomed the FCA’s involvement in locating firms which were providing “unsuitable” advice to the BSPS pensioners, also mentioning the FCA’s announcement to review information from all UK firms providing DB transfer advice, they concluded that it was too little, too late for the victims.
“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,” the committee said in a statement. “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.”
The committee recommended that TPR review the information and provide support to BSPS members as part of the “Time to Choose” exercise, incorporating feedback from the scheme members. The committee also suggested that TPR require all schemes to be able to calculate what each member’s benefits would be under both statutory minimum indexation and PPF compensation rules.
The committee then advised the UK Government to bring forward proposals for a system of “deemed consent” in its upcoming white paper on DB plans. The committee determined that this system would allow the bulk transfer of DB plan members to enter the Pension Protection Fund (PPF) into an alternative scheme providing “unequivocally better benefits than the PPF to those members.”
“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.”