The FCA sprang a significant surprise on the pensions market with news that its bespoke British Steel Pension Scheme (BSPS) redress scheme launched in 2023, had offered no redress to 70 per cent of transferees who had received unsuitable advice.
This was probably not a surprise for former BSPS members who have seen compensation drop significantly, and often to zero, as bond and annuity market conditions shifted dramatically.
The statistic was contained in a report published at the end of July, from the Financial Conduct Authority covering data from the Financial Ombudsman Service and Financial Services Compensation Scheme – essentially covering the different routes to compensation.
It presented a tale of two phases of compensation — with a marked shift around the end of 2022 and into 2023.
Overall figures show that more than 6,500 scheme members had been supported by FOS, the FSCS or the FCA’s redress scheme — or through a skilled person’s review. Out of a total 7,700 transfers, 3,958 had been found to have received unsuitable advice, and at least 1,870 people were offered a total of £106m.
In total £8.87 million had been levied in fines or paid to the FSCS. The release noted that a previous estimate for this figure was £50m.
But a closer look at these figures show much of this was paid out before the launch of this redress scheme.
Compensation figures
The FSCS (pre-redress scheme) has paid out £67.9m, while skilled person reviews imposed on advice firms have led to payments of £19.3m. A further £8.4m was paid out from FOS up to February 2022.
In contrast, the new redress scheme has paid out £8.7m with £3.8m directly from firms and £5m from the FSCS.
The FCA estimates that overall 1,774 members had received unsuitable advice but no redress. In terms of its own redress scheme, some 70.1 per cent were ‘no loss’ cases.
In the release, the FCA said: “Because of changing economic conditions, money paid out under the redress scheme (£8.7m paid by firms or FSCS) is lower than we originally estimated (£50m).”
The linked report added: “Since the FCA introduced the redress scheme, the expected cost of funding a guaranteed retirement income through an annuity has fallen. For example, it now costs less to achieve the same guaranteed retirement income as someone who received redress two years ago. This means that the amount needed to top up a DC pot to put someone back in the position they would have been in if they hadn’t received unsuitable advice, is likely to be less and in some cases zero.
“If a former BSPS member has more in their DC pot than the value of the benefits they would have had if they had stayed in the BSPS, then they won’t be offered any money. This is because even though they received unsuitable advice, they haven’t lost out as a result.
“We understand former BSPS members may be disappointed to receive no money or less than expected. The purpose of redress calculations is to ensure that, as far as possible, former members are put back in the financial position they would have been in had they remained in the BSPS.”
Redress history
The documents also charted what you might call the history of its response.
Since January 2018, the FCA says it began to encourage concerned transferees to contact their advisers, then if unsatisfied FOS, then potentially FSCS.
Yet it was felt that not enough workers were responding, hence the construction of a specific redress scheme.
From March 2023, advisers had to identify cases, review advice, calculate compensation and pay appropriate redress by the end of February 2024.
But as we can see this has seen low or no payments for the majority of affected members.
Broadstone head of redress solutions Brian Nimmo says: “With the FCA rules on redress, the principle is about ensuring that there is sufficient money to go into the marketplace and buy an annuity that will secure the benefits that have been ceded at the point of calculation. For someone who is at retirement or past retirement age, that should be the cost of buying an annuity. It is all based on the market conditions at the time of the calculations.
“If we roll back three years, gilt yields were very low so the cost of buying an annuity was very high and so redress was quite high. Now gilt yields have risen, redress amounts have fallen. So, as we could see towards the end of 2022, it did not look like many former BSPS members would be getting any redress – all due to market movements. Why some ex-BSPS members have obtained redress and some have not, has been a matter of timing. Those that went early with FOS or to their ex-advisers got redress.
“For those who waited, including nearly all in the FCA scheme, the vast majority did not.”
Unrealistic expecations
He also has concerns around expectation management.
“The FCA estimated redress figures were right in early 2021 and 2022. It said it might be an average £60,000, then the market moved a bit, so the average suggested by the FCA became £45,000. The figure of £45,000 never got updated. That was the last message a BSPS member would have seen, yet the vast majority got nil. It would have been a surprise for them as there wasn’t any updating of the messaging.”
Independent compliance consultant Adam Samuel says: “On the redress question, the calculations are so assumption-driven that we never know whether the industry is under-compensating. How do you price the value of pension certainty that you would receive from the PPF?
“Inflation plus high interest rates can inflate the value of final salary transfers because you are replacing a guarantee with an inflated asset value. In a couple of years, things can look different.”
Campaigners who raised the issues of unsuitable transfers in the first place and have continued to work with claimants are clearly angry. They suggest the scheme was misconceived.
Commentator and founder of AgeWage, Henry Tapper says: “It was extensively consulted on back in 2022 and 2023. The agreement, which we strongly contested, meant that basically the point at which the calculation was made was up to the adviser. As the adviser could control the date, they could control the discount rate at which the calculation was made. Many advisers were able to reduce the calculation to nothing.
“That is why 1,774 haven’t been offered compensation even when they were deemed to be misadvised. That system is a nonsense. In nobody’s language is that justice.
“The argument from the IFAs is that redress is not compensation – it is just what is needed to ensure that the member is no worse off, but in our view, the members of the BSPS have been put through the wringer. To suggest that they are no worse off just because some discount rate has been concocted is nonsense.
“These people were ripped off at the start and should have been compensated at the start and even if they had to wait six years their compensation should be based on the point of sale. That is my argument. We made it as strongly as we could. In any case, seven years is far too long to wait for compensation for redress. This is a mighty injustice to steelworkers.”
Tapper adds that for the early compensation cases, the average was in excess of £60,000.
“These were made on discount rates that applied pre-2022. So, when annuity rates went up it was pretty much a pre- and post-LDI crash. Another way of looking at it, is that Liz Truss got the IFAs out of jail.”
Alternative approach
Some advisers say they had proposed a different market approach and that big pension providers were willing to help.
Syndaxi Financial Planning principal Robert Reid says: “A far more intelligent way to have handled this would be with deferred annuities. Then you would have given people the certainty that they would have got from some of the benefit that they had given away, due to bad advice.
“The regulator decided not to do that. There were insurers that were prepared to do it. But the regulator has this wish to get compensation out of the way. Then along came the mini-budget and then people were getting deals of zero and even calculations that were minus.
“I had a case where a person was shown to be better off and that was it. Most commonly it was no compensation cheque. There have been calls for solatium (compensation for other than financial loss) due to years of uncertainty.
“But that is one of the hardest things to calculate given how different people are affected.
“It is a shame. It was certainly not an ideal scheme. It was not well thought out and all-in-all, a failure.”
Further review?
Will this ‘failure’ be challenged? The Financial Regulators Complaints Commissioner Rachel Kent is examining the matter.
Financial adviser Al Rush, principal of Echelon Wealthcare has written to Kent, inviting her to come to Scunthorpe and Port Talbot to meet those affected. He notes that the FCA has offered some steelworkers a £150 payment for not responding to their letters for 18 months.
He writes: “The predicament of the steelworkers is now even more precarious as they face the spectre of widescale redundancies. For two steelworkers with almost identical circumstances to receive on one hand, £85,000 and the other £150 is beyond perverse.”
Rush wants the FCA view that complaints about the redress scheme methodology are part of its legislative function and therefore not covered by the complaints scheme to be challenged.
He suggests finally that an independent report into the redress scheme would “pave the way to fair compensation and shine a light on the events to ensure that this cannot happen again”.
The FRCC is compiling a report and has continued to make further information requests to the FCA. It also extended the window for complaint referrals about the FCA in relation to the BSPS to the end of August this year. An update is expected shortly, so perhaps the matter is not entirely finished yet.