Defined benefit (DB) pension transfers represent “another major mis-selling scandal” that “is already erupting”, according to the Work and Pensions Committee.
In its report into the British Steel Pension Scheme (BSPS), which was published today, the Committee said it had found “worrying evidence” that members of the scheme have been “exploited for cynical personal gain by dubious financial advisers in tandem with parasitical so-called ‘introducers”.
The report comes after 130,000 members of the British Steel Pension Scheme had a new deal struck for them in August 2017 to protect their scheme ahead of a takeover of Tata Steel.
But despite this deal, the Committee found that in the process of transferring their DB pensions into defined contribution (DC) schemes, many BSPS members were “shamelessly bamboozled” into signing up to ongoing adviser fees and unsuitable high-risk investment funds with high management charges and punitive exit fees.
Figures released by the scheme’s trustees on 8 February show that since March 2017, 2,600 pension transfers have been processed by the scheme, for an eye-watering value of £1.1 billion.
On average, the amount transferred out was £400,000, but 20 different transfers saw more than £1 million moved. Advice charges on these transfers typically ran at around 2% of the transfer value, while receiving funds imposed breath-taking annual charges and exit penalties from 5% to as high as 10%.
The Committee is now calling for the banning of contingent charging – where advisers only receive payment when transfers go ahead – which it sees as a “key driver” of poor advice. It is also calling for the creation of an online register of advisers and their current status.
In addition, the Committee is calling on the The Pensions Regulator (TPR) to conduct a review of its handling of the BSPS to learn lessons on how member were let down, and to ensure other schemes are fully prepared to give members an adequate picture of their options in future. Chair of the committee, Rt Hon Frank Field MP is damning in his assessment: “I struggle to fathom how things like contingent fees are, or have ever been, considered an acceptable basis for providing ‘impartial’ advice on a decision like this.”
Mr Field adds: “Once again we find TPR fiddling while Rome burns, when it should have seen this rip-off coming. Given a choice between two defined benefit options worse than what they had been promised, with precious little support in making that choice, many steelworkers were drawn to the superficially attractive third option.
“This is the first deal like this, but there will be more. All the responsible authorities must act, now, to stop more people being cheated. We will be asking all those involved to report back to us on the changes they will make, promptly, to stop this happening again.”
What the regulators say
Responding to the report, a Financial Conduct Authority (FCA) spokesperson says: “The FCA agrees with the Work and Pensions Committee that defined benefit pension transfers are a very important issue. We have been carrying out considerable work within our remit on DB pension transfer advice.
“We have also taken detailed, extensive and robust action on the British Steel Pension Scheme to help steelworkers and we are pleased this has been recognised.
“We believe the Committee’s recommendations are sensible. We are currently looking at the Register to see how we can make it easier to use. We are also reviewing the rules that apply to firms advising on pension transfers, and will consider this report as part of this.”
A spokesperson for TPR adds: “We fulfilled our primary role by evaluating and approving this complex restructuring of the BSPS including obtaining £550 million for the scheme. As part of this rare restructuring, which prevented the company becoming insolvent, a new pension scheme was offered to members as an alternative to entry to the PPF. We believe this was the best possible outcome for everyone involved in what was a very challenging situation, bringing greater certainty for thousands of scheme members.
“We also helped tackle unscrupulous financial advisers who were exploiting the situation and the current high transfer values available by working closely with the scheme trustees, the FCA and The Pensions Advisory Service (TPAS). We went to Port Talbot and took part in a discussion forum with scheme members and others. We reviewed communications sent to members and were satisfied they adequately warned of the dangers of transferring out of a DB Scheme. And, while TPR does not regulate financial advice, we wrote jointly with the FCA and TPAS to members to flag potential risks.
“We note the committee’s recommendations and are continuing to work more closely with the FCA to protect pension savers.”
‘It is extraordinary the members of the BSPS could be let down so badly’
Tom McPhail, head of policy at financial provider Hargreaves Lansdown thinks the failure lies ultimately with the scheme’s trustees and administrators. He says: “It is extraordinary that even after the pension mis-selling scandal of the 1990s, the members of the British Steel scheme could be let down so badly.
“Following the introduction of pension freedom, with transfer values inflated by low interest rates and uncertainty over the scheme’s future, it shouldn’t have come as a surprise that many members were interested in transferring out.
“The scheme trustees and administrators should surely have taken more responsibility for protecting members interests and shielding them from unscrupulous advisers.”
Former pensions minister and director of policy at provider Royal London, Steve Webb, adds that he believes British Steel failed in its duty to its workers but that this should not result in an overly-heavy-handed response. He comments: “The British Steel Pension Scheme and the employer failed to make sure that all workers had access to high quality impartial advice about their pensions and failed to make sure they had enough time to make calm, well-informed choices about whether or not to transfer.
“But the right response to what went wrong is not to clamp down on people’s freedoms to choose what to do with their pensions. Many hundreds of British Steel workers did take good advice and chose either to transfer or not on the basis of that advice, used reputable pension providers where they did transfer and are happy with the outcome.
“It is important not to throw the baby out with the bath water in this case. The right lesson is to clamp down on those who seek to exploit people and scam them out of their pension savings, not to deny workers the chance to reshape their retirement plans if they wish to do so on the basis of impartial expert advice.”