The regulated financial market failed to protect the British Steel Pension Scheme members, according to a damning report from the National Audit Office (NAO) into the wave of bad advice given to BSPS members.

The report, published today, concluded that - based on FCA figures - 79% of the advice given to BSPS members by financial advisers was “unsuitable” or “unclear.”

A raft of financial advice businesses that gave poor advice to BSPS members looking to transfer their pension out of the BSPS scheme have now collapsed.

Compensation costs have yet to finalised but the NAO estimates that 263 BSPS members have lost £18m of redress to date with some individual losses near £500,000.

The NAO said that the FCA had only “limited” insight into the DB transfer market at the time and was not aware of the level of interest BSPS members had in transferring out.

Some people who transferred out of the British Steel Pension Scheme suffered “significant financial losses” because they were provided with unsuitable advice, the NAO said. Most have yet to be fully compensated.

Looking at key facts, the NAO found that the British Steel Pension Scheme (BSPS) was a large Defined Benefit (DB) scheme sponsored by Tata Steel UK. It was restructured in 2017 after Tata Steel experienced financial difficulty. 

A wide range of bodies, including government organisations and regulators, were 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.

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 adviser if the value of their pension was greater than £30,000. Almost 8,000 members chose to transfer their benefits out of the scheme to another pension arrangement and 95% of these decisions were informed by independent financial advisers, the NAO report revealed.

The NAO found that BSPS members were “particularly vulnerable” to pension advice mis-selling. 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). 

Communication and support provided to members at the time of the scheme restructure was "not adequate" to inform their decision, according to a number of agencies.

The financial advice market itself was not prepared for the impact of the BSPS restructure, the NAO said.

Advisers in the local steel-working areas saw very rapid growth in requests for DB transfer advice. The FCA 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 advisers 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 because the number of BSPS transfer requests was held by the scheme trustees and administrators who are not FCA authorised. 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 adviser 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, much higher than for the DB transfer market in general (17%).

The FCA responded by working with the adviser market and pension members and diverted staff to work on the BSPS. It also 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 so far 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. From 2018 it began collecting more data from financial advisers 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.

While the FCA has made progress 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 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.

A total of 263 pension scheme members have lost £18 million of redress so far because financial advisers have gone into liquidation and there are limits to the compensation that can be provided. Some 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.

Some 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.

The NAO also found that 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.

Gareth Davies, the head of the NAO, said: “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.