The thing about pensions is they are vitally important, but can be extremely complicated.
For many people, their pension pot is the single largest amount of money they will ever have access to. But the support and advice for people in handling them is often fragmented and insufficient, leaving people open to abuse. Sadly, this has become more apparent in recent years, as we see increasing numbers of cases of rogue financial advisors offering poor advice and encouraging thousands to put their pensions savings at risk.
Under pension freedoms brought in by the former chancellor George Osborne in 2015, pensioners have more opportunities to transfer money out of their defined benefit (DB) pension scheme. More than 200,000 people have made use of these freedoms, with £50bn transferred out of DB pension schemes between 2015 and 2017 alone.
Alongside these numbers, problems have grown too and the amount of compensation paid out for poor pension transfer advice doubled from £20m in 2016 to over £40m by 2018.
Last winter saw a particularly extreme category of pensions storm hit South Wales and other traditional steel-working areas, when members of the British Steel pension scheme (BSPS) found themselves aggressively targeted by rogue financial advisers.
After the steel industry’s serious difficulties throughout 2016, Tata Steel had begun a process of restructuring the substantial British Steel pension fund. The 125,000 members of the pension scheme had a hard deadline by which to decide what they wanted to do with their pension pots.
There were three main options available to them:
- Move into a new British Steel pension scheme.
- Be transferred into a government-backed ‘lifeboat’ scheme.
- Transfer their pensions out of the scheme and into alternative investments.
As a work and pensions committee report found, it is generally not recommended to transfer out of a reliable defined benefit pension scheme, which made the first option the safest for the vast majority of pension scheme members.
While 83,000 pensioners did opt for this, doubts regarding Tata and the pension scheme, coupled with unclear information and misleading advice, meant that around 8,000 steelworkers ended up transferring out altogether. Of those, 872 were advised to do this by firms which were ordered to stop advising by the Financial Conduct Authority (FCA). Some of these steelworkers ended up losing thousands through investments which were not in their financial best interests.
To date, nearly £300,000 has been paid out in compensation to steelworkers who were negligently advised by one firm alone.
When I heard the first reports about pensions misselling in South Wales in late 2017, I was concerned – the response of the government and key regulators to similar situations in the past has been deeply flawed.
However, concern soon turned to alarm as the full scale of the crisis began to unfold and I was hearing from constituents who were worried and losing sleep after being talked into transferring their hard-earned pension pots to questionable investments by an advisor who had approached them with a sales pitch while they were on a family holiday.
Despite this level of clear and present risk to people’s financial security, the necessary support from the government – either to prevent these cases from happening or to help in the aftermath – was often not there. In fact, people were expected to take up their concerns with the very advisers they suspected of trying to fleece them.
Nor was getting the necessary information any easier. The FCA directory was not fit for purpose, with important details obscured by highly technical, legal language which was all but indecipherable to anyone outside of the industry.
Most worryingly though, the response of key regulators was uncoordinated and far too slow. It was only late in 2017 that the FCA began actively moving against firms that were suspected of offering poor advice, by which point it was simply too late.
Reports have been prepared and lessons are being learnt, but we need to do more and far more quickly to make sure this kind of crisis does not happen again. The government and the key regulators have to do better to try and prevent what my constituents and many others had to deal with.
At a minimum:
- Pension freedoms need to be backed up by proper regulatory safeguards to deter bad behaviour and protect consumers.
- Regulators need to act decisively against rogue advisors. When necessary, their authorising legislation may need to be clarified to allow for tougher penalties.
- Information has to be consumer-friendly and readily available.
While rogue financial advice will always be a risk, with some common-sense changes to regulation, better consumer advice and tougher penalties for bad actors, we can more effectively protect our pensioners against it in the future.