Defining Broken Transfers: How British Steel brought DB transfers to the fore

    Summer series continues

    The first time I realised the scale and importance of the British Steel pensions saga was when I heard the news that the adviser and the unregulated introducer at the heart of the scandal were called to Parliament to explain themselves to the Work and Pensions Select Committee (WPC).

    The first time I realised the scale and importance of the British Steel pensions saga was when I heard the news that the adviser and unregulated introducer at the heart of the scandal were called to Parliament to explain themselves to the Work and Pensions Select Committee (WPC).

    I had only been working as a journalist for a grand total of 14 months and had seen nothing like this before. Where my junior career had so far largely been full of press releases and the odd consultation paper from the Financial Conduct Authority (FCA), the story of the British Steel saga had a real narrative and it deeply affected a lot of people.

    One article would lead to another – I have since written more than 100 on British Steel pensions – and a key component in one would be used to demonstrate a point by the likes of the parliamentary committees. There was no doubt this story was huge and the financial well-being of real people were at stake.

    But I was not the only one to feel the enormity of such a crisis. No sooner than it came to light that numerous men – it is still unclear just how many – had been given poor advice in such concentrated geographical areas of the UK, that a group of self-starter financial advisers stepped in to help. Cue Operation CHIVE.

    The pro-bono initiative, handily turned into an acronym from ‘Counselling, Help, Information, Volunteer Exchange’, is spearheaded by Echelon Wealthcare managing director and IFA Alastair Rush. Back in 2017, CHIVE rushed to areas of the country home to British Steel plants to give free guidance to those affected by the closure of the steel giant’s pension scheme. The initiative was so successful that it won the backing of the Personal Finance Society.

    For a number of reasons that will be discussed in detail later in this article, the British Steel saga was unique. Looking at FCA figures, however, it is possible the sort of poor advice given to steelworkers could be being replicated across the UK in a way that has attracted far less attention. Did the British Steel saga encapsulate the characteristics of something much larger? Or was it an unfortunate one-off scenario that served to damage the reputation of the financial advice sector because of a few bad eggs?

    The uniqueness of BSPS

    In March 2016, Tata Steel announced it would be examining options to restructure the business, which would include decoupling the defined benefit (DB) pension scheme from the company.

    In the case of BSPS, the government was keen to explore options that would allow members the chance to receive Pension Protection Fund-level benefits where possible. Then, in December 2016, Tata Steel UK decided to close the scheme to further accrual from 31 March 2017. A little more than a month after that date, in May 2017, the PPF announced that key commercial terms relating to the Regulated Apportionment Arrangement (RAA) – a restructuring mechanism that allows financially troubled employers to detach themselves from their DB pension liabilities – between Tata Steel and The Pensions Regulator had been reached.

    Under those plans, Tata Steel set up and sponsored a new pension scheme, BSPS2, subject to the satisfaction of certain conditions relating to funding size. BSPS members were given the opportunity to move into the new scheme prior to the existing scheme entering the PPF, or to transfer out altogether.

    In total, almost 83,000 members of BSPS – of a total 130,000 – chose to move into BSPS2. Some 39,000 members ended up in the PPF because they did not express a choice or because they chose to do so. Of the 44,000 members who were entitled to a Cash Equivalent Transfer Value (CETV), around 8,000 transferred their benefits away from the DB scheme.

    According to an independent report written by the former CEO of the Money Advice Service, Caroline Rookes, there was a range of factors that resulted in steelworkers receiving poor advice. She finds it was a combination of rumours, a lack of access to information, and a short time-frame for members to decide whether to transfer to BSPS2 – if indeed the new scheme went ahead (it was not guaranteed at the time) – go into the Pension Protection Fund (PPF) or transfer out entirely, known as the ‘Time to Choose’ exercise.

    These factors, she said, combined with concentrated geographical locations, created the perfect storm that made way for poor – and in some cases unscrupulous – advice given to steelworkers. In her report, Rookes lists the following as reasons why the situation was particularly unique:

    1. Communities like steel plants are tight-knit, which led to members getting scraps of information on a so-called “nod and wink” basis. As a result, incorrect rumours started to spread and technical managers not qualified to advise on pensions matters began to give members ‘information’.
    2. Member-nominated trustees were unable to give members information because of confidentiality issues. This, once again, meant rumours started to spread, specifically that managers and trustees were taking their pensions in cash. According to Rookes, trustees were focused on working with The Pensions Regulator and others to set up the successor scheme and neglected support for members and their choices.
    3. The exercise was carried out within a very limited period of time. Some 130,000 steelworkers had just a few months between September 2017 and 31 March 2018 to choose what they wanted to do with their pensions and go through the appropriate process.
    4. There had been mis-information flying around from the get-go. Before ‘Time to Choose’, the PPF was presented to members as a poor outcome and one to be avoided.
    5. The concentration of the members across four geographical areas, according to Rookes, made the members “sitting targets for unscrupulous advisers”.
    6. Steelworkers were offered extremely high transfer values, making a transfer look even more attractive.

    For all the reasons listed, British Steel proved to be a unique scenario. That said, however, FCA statistics on steelworker transfer advice are not all that dissimilar from the watchdog’s wider work on the market.

    In October 2017, the regulator carried out some work that found just 47% of 88 DB transfers it had reviewed, which were not specific to British Steel, were suitable. One-in-six (17%) were deemed to be categorically unsuitable and the remaining third (36%) were inconclusive.

    For those who had advised steelworkers, however, the regulator found that suitable transfer advice had been given in a little more than half (51%) of cases – just four percentage points higher than it found for the general population. However, it deemed a third (33%) of transfer advice to be unsuitable and did not conclude whether the advice to transfer out of the BSPS was suitable in the remaining 16% of cases. It appears the FCA was more certain of poor advice given to steelworkers than poor advice given to the general public. Only half of transfers were suitable in both markets.

    Local problems

    Whether the British Steel saga was reflective of wider goings on in the market is debatable. On the one hand, the situation was made up of a unique blend of components that enabled the perfect storm to form for poor advice. On the other, as one commentator puts it, the saga merely served as a “window of opportunity” for certain advisers to make some money. And, while that window is closing, he believes similar circumstances reflective of British Steel can be found elsewhere.

    Niche IFA director and Chartered financial planner Ray Adams gave DB transfer advice to steelworkers at the height of the British Steel saga but shut his doors to the men seeking advice before the news made it to the press. He has since been visited by the FCA but, unlike many firms in south Wales who gave advice to steelworkers, never lost any regulatory permissions. He believes the situation will not be replicated elsewhere and is optimistic that scheme trustees are reluctant to make the same mistakes again.

    “I know most things are cyclical,” mulls the Welsh adviser, “but I don’t think the British Steel situation will be repeated because there was a few factors that created the perfect storm.

    “I was on the phone with a very, very large company that advised on several hundred DB schemes around the country, and they want to learn from the British steel situation as to how they do communication [with members] in the future.

    “Following a presentation I did in London a few months ago at Westminster, several people contacted me asking me if they could pick my brain and learn from the experience, which I think is fantastic. The trustees of other DB schemes saw me do a presentation and said: ‘We need to learn from what went wrong at British Steel so we can make sure that any communications we need to do with our members [are clear, and] we can learn from what went wrong.'”

    First Actuarial business development director Henry Tapper, who spoke with steelworkers during the saga and writes a pensions blog that chronicled British Steel developments, says there was nothing unusual about the British Steel other than its “intensity”.

    He explains: “I would say it’s an intensification, right? I wouldn’t say there was anything that was unusual about British steel other than the intensity.

    “If you look at Ford, where they’ve had a big problem in Dagenham, there are the same issues: a loss of confidence in Ford and a strong presence of financial embedded into the workforce through the unions.

    “For Lloyds Banking Group’s [scheme], if you look at Halifax and certain centres where there were high concentrations of transfers, it’s the same thing. There’s a loss of confidence, embedded high quality services from the advisers and low levels of understanding of the nature of the scheme and what they were giving up.”

    In Halifax, Tapper explains, LBG discovered a firm of advisers were presenting on company premises, which correlated with a spike in transfers. According to the actuary, one of the IFA firms heavily involved in transfers was subsequently banned from doing so by the FCA, meaning the pipeline of uncompleted transfers could not be transacted.

    At a Ford plant in Dagenham, meanwhile, a well-known union official was referred to as Lionel Messi, Tapper says. The official gained the nickname because it is thought to be that, when Lionel Messi eventually leaves Barcelona, everyone will leave Barcelona. Once the union official left Dagenham, Tapper explains, there was a rush of transfers.

    “What I’m saying is that, actually, these are very local things. What I’m trying to get across is I don’t think the pension freedoms are the primary driver. I think the primary driver was really high quality entrepreneurial salesmanship from advisers who had targets to hit and knew exactly what they were doing.”

    Tapper describes the British Steel saga as a “window of opportunity” for certain advisers but recognises there are particular factors now closing that window, so to speak. Factors like a fall in the size of transfer values offered to scheme members, increasing professional indemnity insurance costs for adviser firms carrying out DB transfers, which make the practice look less appealing, and the FCA’s threat to “close down firms”.

    Those close to the British Steel situation no doubt agree it was exceptional, but at least one onlooker appears to believe there is a desire to learn from the experience, while another feels something similar could happen again, albeit on a smaller scale.

    Pensions in the news

    The British Steel saga’s uniqueness extends to the reaction from the FCA, which elicited some of the strongest words from the regulator I have heard.

    To quote Tapper, the FCA were, at least initially, “asleep at the wheel”. For me, one of the stand-out stories to come from the saga that was that Active Wealth UK, the firm that has cost the Financial Services Compensation Scheme (FSCS) more than £1m and was the first to lose its permissions after advising steelworkers, had been on the regulator’s radar since August 2016 – a total 15 months before it was contacted by the FCA for advising steelworkers on their transfers.

    Of course, we do not know whether it was working with Celtic Wealth Management – the introducer accused of giving advice – at the same time, but I can only imagine the FCA, with hindsight, would have taken action and revoked the firm’s permissions far earlier.

    Following the British Steel saga, regulation around DB transfers started to change and direct action from the FCA is plain to see. For starters, the financial watchdog recently surveyed 3,015 adviser firms with pension transfer permissions to try and better understand transfer advice in the market.

    It also abandoned mooted plans to drop the assumption that a DB transfer is generally considered unsuitable for most people, after it said “unsuitable advice [is] being given in the area”. Most recently, and perhaps most dramatically, it decided to formally consult on banning contingent charging on DB transfers. It had previously said it could find no immediate connection between the charging method and poor advice.

    There were several components that led the FCA to sit up a take notice following the British Steel saga, CHIVE founder Alastair Rush believes. For example, the demographic of the steelworkers, the relentlessness of the advisers helping the steelworkers where they could and the fact pensions had recently made national news with the collapse of retail giant BHS, which saw more than 10,000 employees have their pension benefits cut. That is not to mention MPs like Frank Field got involved and, very publicly, gave the FCA a dressing down.

    Additionally, Rush points out, Tata Steel had been in the news after its UK plants were put up for sale in March 2016, leading to months of uncertainty and national coverage. There was even a march on Westminster at which more than 100 steelworkers chanted “save our steel!”.

    And it would have been hard for the regulator, I am sure, to ignore the voice of the national media. The Financial Times reported extensively on the crisis, describing steelworkers as targeted by “pension sharks” back in November 2017. The Guardian ran headlines such as “steelworkers let down by FCA and Pensions Regulator”, while the BBC made reference to a “feeding frenzy” in a November 2017 article on steelworkers’ pensions.

    But has the FCA gone far enough?

    Ray Adams says he has seen personalised correspondence between the FCA and steelworkers, which he believes was sent to every person who transferred out of BSPS in south Wales. “I’m guessing that’s fairly unheard of, isn’t it?” he ponders.

    The FCA has also made an effort to visit Port Talbot on a number of occasions to speak with former members of the BSPS who are concerned they may have received unsuitable advice when they transferred out away from their DB scheme. It even has an event set up for them in south Wales soon on Thursday 5 September. But has it done enough to prevent such a crisis happening again, and gone far enough to assist with the steelworkers?

    Rush, who grew up in Port Talbot and has since set up an office in the steel town to better handle his work with steelworkers, and partners with Clarke Willmott solicitor Philippa Hann to help the steelworkers get adequate compensation, says the steelworkers do not have a good word to say about the regulator, advisers, nor the FSCS.

    “Nobody in Port Talbot has a good word to say about the regulator. In fact, no one in Port Talbot has a good word to say about Tata, the management, the unions, the government or the IFA community in general, so I wouldn’t read too much into that. The truth is, Port Talbot is about as far removed geographically and metaphorically from the decision making hub of the south east as is possible to be imagined. ‘Al, you can’t tell me that this would happen within the M25′, is a pretty typical refrain.”

    He continues: “Two years on, the men and their wives are angry that problems continue to be stumbled through with the FSCS, more so than the FCA. Sure, everyone wants to see prosecution and justice, but there is the feeling that the matter is forgotten and that everyone wants to move on. The men are also incredibly well informed: ‘Andrew Bailey wants to be governor of the Bank of England,’ one told me.”

    That said, Rush says he “kind of” sympathises with the FCA “despite it being the untrendy thing to do”.

    “I know that life is never black or white – sometimes it’s shades of grey. I know that, from the outside, a sub-optimal situation might appear to be evidence of incompetence. But I also know that, when you scratch the surface, a myriad of subtle nuance come to the fore. Some of it is excusable, some of it not. Some of it is group-think and some of it is the incredibly complex interweaving sets of circumstances that prevail.

    “That is not to say the FCA gets a free pass,” he adds. “I think it is too regimented, too hierarchical, too vertical, too rigid. I accept that it is dealing with legal issues but – and I have said this for a few years now – it needs to be able to engage in an asymmetrical manner.

    “Having said that, I have always found the personal qualities and characteristics of the staff who are engaged with this matter to be exemplary. Unlike the invariably public perception, I have found them to be polite, focused, diligent and professional. I, privately, have had robust and direct conversations with some staff about some matters. Staff who are prepared to fight their corner with me – and I respect that hugely.”