"Matthew Connell explores how the British Steel Pension Scheme exposed failures of regulation"
In July, the Public Accounts Committee published a report on the effectiveness of the Financial Conduct Authority’s (FCA) handling of transfers out of the British Steel Pension Scheme (BSPS).
The Public Accounts Committee is one of several select committees that oversee the work of government and government agencies. The committee that usually oversees the work of the FCA is the Treasury Select Committee, so the existence of this inquiry invites the question, why has this committee intervened now and why has it focused on the FCA alone, rather than the other regulators and government departments that were involved in the British Steel pension saga?
British Steel workers were members of a defined benefit (DB) pension provided by their employer. In 2017, they were informed that the pensions benefits they were expecting would be reduced, because of financial pressures on British Steel. They had three options:
- Switch to a new employer scheme with lower benefits.
- Stay in the existing pension scheme, which would be admitted to the statutory Pension Protection Scheme, also with lower benefits.
- Transfer out of the scheme into an individual pension scheme.
For some members who were considering transferring out of the scheme, the financial advice given by regulated advisers fell far short of minimum professional standards – although it should also be acknowledged that many BSPS members received good advice on transfers in a complex and rapidly-shifting context.
The committee found that the FCA had “consistently been behind the curve in responding to the catastrophic impact on British Steel Pension Scheme members”. It was also concerned that “there have been reports of ‘phoenixing’, in which rogue advice firms voluntarily leave the market only to repaper under different names”.
One key finding was around a lack of collaboration within the regulatory sphere, where “transfer data is monitored by The Pensions Regulator (TPR), the regulator of occupational pension schemes, but was not collected in real time or shared with the FCA”.
The committee recommended: “The FCA should examine what can be done to improve the data and insight that it needs to inform a more proactive approach to regulation.”
In reality, the failures of regulation around BSPS cannot be laid at the door of one institution
It also pointed out the shortcomings of the current rules on professional indemnity insurance (PII), saying: “The availability of PII has become severely limited because insurers are struggling to accurately predict the risk of DB transfer advice, reducing the number of providers willing to provide cover.”
However, the committee did not look into deeper problems with the regulatory structure, some of which had been exposed by an earlier report by the Department for Work and Pensions Select Committee, which made two more key observations:
- That the options packs for members created by the BSPS “proved inadequate for many scheme members” and that “it was the responsibility of the TPR, which oversees trustees… to… ensure that members were not left in the dark”. It added: “Along with the PPF and the government, they afforded insufficient priority to ensuring the steelworkers were adequately informed.”
- That “despite the pension scheme’s efforts, 25,000 of its 124,000 members did not respond to the ‘Time to Choose’ exercise”, adding: “They are therefore heading for irreversible default into the PPF. Thousands of those members would have been better off in BSPS2, including some ill or elderly pensioners who may well have been unable to decide in their own interests.”
Shared responsibility
In reality, the failures of regulation around BSPS cannot be laid at the door of one institution. Some advisers gave very poor advice, while the FCA could have done more and acted sooner – though its intervention was far quicker than previous regulators on issues like pension mis-selling, mortgage endowments and payment protection insurance.
However, the committee’s aim “to prevent a similar case from occurring again” is unlikely to be realised if the whole regulatory system is not reformed. This would include:
- Better policymaking, with more genuine consultation, than existed in 2015 when the Treasury introduced pension freedoms.
- A better system of communication from pension schemes to members, with pension schemes playing a more proactive role in warning members about risks.
- More action from pension schemes and their regulator to ensure that members who make poor choices can be reintegrated into their pension scheme.
- A better system of funding regulation than the Financial Services Compensation Scheme, as well as compulsory professional indemnity insurance.
The system requires a significant rethink around legislation and regulatory responsibilities. The PFS will continue to campaign for a regulatory system that is better able to serve the basic interests of the public.
Matthew Connell is policy and public affairs director of the CII
