Some people who transferred out of the British Steel Pension Scheme have suffered significant financial losses because they were provided with unsuitable advice, the regulated financial advice market failed to protect them, and they have not been compensated fully, according to the National Audit Office (NAO).
The British Steel Pension Scheme (BSPS) was a large Defined Benefit (DB) scheme sponsored by Tata Steel UK.1 It was restructured in 2017 after Tata Steel experienced financial difficulty. A wide range of bodies, including government organisations and regulators, have been involved in the BSPS restructure, the regulation of the pensions and advice markets, and the provision of redress to affected steelworkers.
During the BSPS restructure, members had to decide between two options for managing their pension benefits.2 Some 44,000 members also had an alternative statutory option to transfer their pension fund out of the scheme altogether. Members that wanted to transfer out of a DB pension scheme were required to take financial advice from a regulated advisor if the value of their pension is greater than £30,000. Almost 8,000 members chose to transfer their benefits out of the scheme to another pension arrangement. 95% of these decisions were informed by independent financial advisors.
BSPS members were particularly vulnerable to pension advice mis-selling. Pensions are highly complex and most BSPS members had limited experience of making decisions about their pension or using a financial advisor. Members had a limited time to decide what to do with their pension and the value of members’ benefits were substantial (the average transfer value was £365,000, with some worth over £1 million). Other reviews of the BSPS case have found that the communication and support provided to members at the time of the scheme restructure was not adequate to inform their decision.3
The financial advice market was not prepared for the impact of the BSPS restructure. Advisors in the local steel-working areas saw very rapid growth in requests for DB transfer advice. The Financial Conduct Authority (FCA), which is responsible for supervising financial advisors, told the NAO that many of the advice firms had limited experience of processing large numbers of DB transfers and did not respond appropriately to the increased demand for their services. Most advisors were financially incentivised at the time to recommend to members that they transfer out of the BSPS, even when it was clearly not in members’ interest. The FCA estimates that 79% of BSPS members who received advice transferred out of the scheme.
The FCA had limited insight into the DB transfer advice market and what was happening in the BSPS at the time of its restructure. 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. The FCA did not have any data on the number of DB transfer requests that were taking place, or on the advisor market in the local areas.
Financial advice was unsuitable in 47% of BSPS cases and unclear in a further 32% of transfers according to the FCA. This is much higher than for the DB transfer market in general (17%).
The FCA responded by working with the adviser market and pension members to try to contain the most immediate harm. For example, it diverted staff to work on the BSPS and communicated with advice firms to remind them of its regulatory expectations. It wrote to BSPS members who were considering transferring out to urge them to be careful and helped to organise a dedicated helpline for members seeking further guidance.
The FCA has issued £1.3 million of fines and has 30 more enforcement investigations ongoing. It has also changed its approach to regulating the pensions advice market in response to the BSPS case. For example, from 2018 it began collecting more data from financial advisors and has changed the way it engages with regulatory partners, such as developing a joint protocol to enable early intervention in DB transfer cases and banning charges where advisers are paid only if a transfer proceeds.
The FCA has worked with financial advice firms and regulatory partners to provide redress to some BSPS members and encouraged other members raise complaints. To date, only 25% (1,878) of members who transferred out of the BSPS have sought redress through complaints. The FCA is yet to decide whether to implement a consumer redress scheme for BSPS members, in which all firms involved would have to review their advice and potentially offer compensation. The FCA must gather evidence to meet certain legal tests before it can implement this scheme. The regulator started assessing the suitability of a consumer redress scheme in April 2021 and expects to launch a consultation on this by the end of March 2022.
263 pension scheme members have lost £18 million of redress to date because financial advisors have gone into liquidation and there are limits to the compensation that can be provided. 22% of complaints made to the Financial Ombudsman Service (the Financial Ombudsman) have been passed to the Financial Services Compensation Scheme (FSCS) due to firms being unable to pay compensation. The average loss for BSPS claims resolved by FSCS is £82,600, with individual losses ranging from £0 to £489,000. The FSCS’s compensation limit for advice firms that failed after April 2019 is £85,000.
72% of the Financial Ombudsman’s cases and 40% of FSCS’s claims have also been made through claims management companies or legal representatives, who charge a fee for their service. This means some BSPS members have not received the full amount of redress owed to them.
There have been wider market impacts from the costs of compensation. The price of the relevant insurance cover for financial advisors has increased significantly since the BSPS case, with some insurers refusing to cover this type of risk altogether. The number of firms providing DB pensions transfer advice has also more than halved between 2018 to 2022.
“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.”
Gareth Davies, the head of the NAO
Read the full report
Investigation into the British Steel pension scheme
Notes for editors
- The two main types of workplace pension are Defined Benefit (DB) and Defined Contribution (DC) schemes. DB schemes provide a guaranteed income to its members in retirement, based on how many years they have worked and the salary they have earned. In contrast, DC schemes do not guarantee members a certain level of retirement income – this will depend on the contribution and investment choices made by each member.
- Members could stay in the BSPS, but this was expected to enter the Pension Protection Fund (this fund is designed to protect members of a scheme where the employer has become insolvent, but typically pays somewhat reduced pension benefits). Alternatively, they could join a new successor scheme set up by Tata Steel (which was offering to provide similar benefits to the BSPS but with lower future increases). This exercise was known as ‘Time to Choose’ and ran between October and December 2017.
- Two previous reviews have examined the BSPS case:
- In February 2018, the Work and Pensions Select Committee reported on the choices faced by members during the BSPS restructure in 2017.
- In January 2019, an independent review examined the communications and support provided to BSPS members at the time of the restructure.
- Press notices and reports are available from the date of publication on the NAO website. Hard copies can be obtained by using the relevant links on our website.
About the NAO
The National Audit Office (NAO) scrutinises public spending for Parliament and is independent of government and the civil service. It helps Parliament hold government to account and it uses its insights to help people who manage and govern public bodies improve public services.
The Comptroller and Auditor General (C&AG), Gareth Davies, is an Officer of the House of Commons and leads the NAO. The NAO audits the financial accounts of departments and other public bodies. It also examines and reports on the value for money of how public money has been spent.
In 2020, the NAO’s work led to a positive financial impact through reduced costs, improved service delivery, or other benefits to citizens, of £926 million.