British Steel saga raises questions on advice market and transfers

“I’m looking currently at changing that choice because I don’t believe I’ve made an informed decision,” the shift operations manager at British Steel’s Teesside plant told MPs on Wednesday at an inquiry of the Work and Pensions Committee.

At the same hearing, the Financial Conduct Authority has restated its concerns about the decisions being made to transfer out of defined benefit schemes across the country. So what lessons can be learnt from the British Steel saga, and do regulators need to embark on a programme of reforms?

Advice market has failings

For Labour MP and Work and Pensions Committee chair Frank Field, it is the FCA themselves who need to raise standards.

The FCA has stopped four companies from advising on transfers in the wake of the various investigations into steelworkers’ pensions, and it now says six more companies will be investigated.

However, the watchdog has not disclosed exactly what the firms have done, and Field criticised the speed of its reaction.

“While the action the FCA has finally taken to protect members of the BSPS is welcome, I remain concerned that its overall approach has been grossly inadequate," he wrote in a letter to the watchdog. "The FCA is a consumer protection body. It would behove them to stop pussy-footing around and start protecting consumers."

An FCA spokesperson confirmed receipt of the letter and that the watchdog would respond to it.

It’s important to fix the roof when the sun is shining

Margaret Snowdon, PASA

At the select committee's inquiry into BSPS last week, FCA director of supervision Megan Butler said: “We recognise that this advice around the transfer of pensions is perhaps the most complex piece of financial advice... ever heard by the client but also [the most complex] provided by the adviser, which is why they need special permissions to do it.”

However, there are signs that the industry needs further reform, with evidence to the committee suggesting that conditional charging is pushing advisers towards recommending transfers, often into products with unreasonable exit fees.

When the watchdog began specifically investigating transfers out of the BSPS, Butler said it found “a high level of confusion about the schemes and the choices” among members of the scheme and concerning advice being given.

The deadlines set for members to decide on their options might have exacerbated problems and strengthened the hand of unscrupulous advisers. Caddy, for example, was unable to find an adviser he trusted fully in the time provided.

Should you promote transfers?

Alongside the FCA’s crackdown on poor transfer advice, there might be a lesson for trustees and others involved in large pensions restructuring.

“If you’re a scheme who’s got a similar situation you would probably look to make sure that you have advisers on side to pick up that demand,” said Nathan Long, senior pensions analyst at investment platform Hargreaves Lansdown.

The FCA has maintained that the default course of action should be to not transfer out of a DB pension scheme.

“I don’t know necessarily that the rest of the industry is echoing those sentiments quite as strongly as they should,” said Long.

Consumers are being pushed towards the door by conditional charging, where advisers only take a fee if the transfer goes ahead. Long said this should be brought to an end, but equally he warned that some schemes are not helping by issuing transfer value estimates to members who have not asked for them.

Are pensions freedoms helpful?

In an insolvency case like BSPS, it was always going to be essential to give members as much choice as possible over how to manage their retirement assets.

Andrew Warwick-Thompson, chief executive of the LGPS Central pool and former regulatory policy director of the Pensions Regulator, said the key problem appears to have been the availability and quality of advice in the area. He said transferring into the Pension Protection Fund was not “the disaster that it is popularly perceived to be”.

Part of the wider clamour for transferring out of DB schemes in the UK has been the fault of freedom and choice, according to Warwick-Thompson.

He pointed out that members have been able to transfer out to their own personal pension schemes since 1989, and argued that freedom and choice has only introduced the option to take cash.

“It benefits very few more consumers than the pre-April 2015 regime, and has unrealistically raised popular consumer expectation that transferring out of their DB scheme will be right for them,” he said.

“That expectation leaves consumers exposed to the unscrupulous and criminal, and to making a detrimental choice more likely, which cannot be a good thing.”

Clean your data now

Steelworkers’ decisions around their retirement have also been frustrated by the quality of the scheme’s record-keeping. Witnesses told the select committee they still do not have all the information they need.

Pension scheme data quality in the UK is widely accepted to be patchy. Given that, Margaret Snowdon, chairman of the Pensions Administration Standards Association, said it was imperative that all schemes clean up their data.

“It is always when schemes have some transformation work that they regret having put off data cleansing earlier,” she said. “It’s important to fix the roof when the sun is shining – it’s too late and too costly when about to embark on a big project.”