The Financial Conduct Authority and the Treasury “should consider whether there are lessons to be learned” about how they work together to mitigate risks to consumers arising from policy changes, the National Audit Office has said in its report about the British Steel pension scheme. 

 

Members of the defined benefit scheme of British Steel transferred out to defined contribution arrangements in their thousands – nearly 8,000 of the 130,000 strong fund did so, representing 18% of those eligible – when the pensions were restructured in 2017 and 2018.  

 

Of those who transferred, 95% received regulated financial advice, but 47% of this advice was later estimated by the FCA to be unsuitable, with a further 32% considered unclear, leading to financial losses for individuals and a national scandal. This subsequently led policymakers to ban contingent charging by advisers; as a result of this and the increased cost of insurance, the DB transfer advice market has shrunk by more than half. Since British Steel, parliament has also passed legislation which gives trustees more powers to block transfers if they raise red flags and the FCA plans to introduce a consumer duty for firms.

 

The Pensions Regulator had previously commissioned an independent review of the British Steel scandal in 2019 by Caroline Rookes, following a 2018 inquiry by the Work and Pensions Committee. The Rookes review found that the fund’s ‘Time to Choose’ exercise generated a response rate of over 80% and the vast majority of BSPS members selected the right option for them. However, unscrupulous advisers had made contact before this exercise started, with “financially naïve" members being unsure what falling into the Pension Protection Fund would mean for them. Transfer warning letters sent by regulators were “too little, too late”, said Rookes – many members had already made up their minds. 

 

The events around British Steel brought into stark relief the effects that poorly conceived and executed policy can have on individuals and the financial system as a whole and have already led to a series of policy changes. The NAO made it clear that failures in the introduction of the pension freedoms were at the heart of the issue. 

 

“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,” the NAO said. 

 

The risk of large numbers of members transferring out of a DB scheme remains, it added and regulators “should consider what further changes can be made to minimise the risks” linked to transfers, including considering the strength of existing safeguards in the transfer process, the regulatory data needed to support intervention and the powers to collect this, as well as how to communicate key messages effectively with less accessible firms and consumers. 

 

The NAO also found that despite large numbers being given unsuitable advice, redress has only been claimed by a small proportion of these. “The FCA, the Financial Ombudsman and [Financial Services Compensation Scheme] should reflect on their experiences in trying to reach affected consumers to understand what worked well and what could be improved in future,” the NAO recommends.  

 

It also found that pension scheme members have lost £18m of redress to date as financial advisers went into liquidation and were unable to compensate them. So far, 22% of complaints made to the Financial Ombudsman have been passed to the FSCS because firms were unable to pay, but compensation awarded by the FSCS is limited to £50,000 for claims before April 2019 and £85,000 for firms that failed after that date. The FSCS has estimated that the total loss for its upheld BSPS claims is £55.3m, and the total compensation awarded by it £37.3m, resulting in a shortfall of £18m. The average loss for BSPS claims resolved by FSCS is £82,600, with individual cases ranging from £0 up to £489,000. 

 

The NAO notes that for other mis-selling scandals like Arch Cru and London Capital and Finance, special redress schemes were established.