IFAs — British Steel Pension Scheme transfer redress

This case study is an anonymised composite based on publicly reported PI claim patterns. It is not actual Apex client data and does not constitute legal or insurance advice. Names, locations and identifying details have been changed. Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority, FRN 724952.

The firm

A four-adviser IFA practice in south Wales, regulatory revenue around £1.4m. The firm took on a meaningful book of clients during the British Steel Pension Scheme (BSPS) “Time to Choose” exercise in 2017, when members were required to choose between transferring to BSPS2, moving to the Pension Protection Fund, or transferring out to a personal arrangement. The firm held DB transfer permission and had one Pension Transfer Specialist.

What happened

The BSPS pattern is well-documented. A large workforce, much of it concentrated in a small number of communities in south Wales and Yorkshire, faced an unfamiliar and time-pressured choice about retirement benefits with substantial CETVs on the table. The combination of community-level peer effects, financial press attention to high CETV multiples, and a relatively small number of advisers active in the local market produced a high volume of transfers — many of which the FCA subsequently determined to have been recommended on inadequate grounds.

The firm advised approximately 90 BSPS members during the relevant window. Recommendations to transfer were made in around 70% of cases. The firm’s process used a single suitability template with limited tailoring; the cashflow modelling was deterministic; the assessment of attitude to risk and capacity for loss was, on retrospective review by an external skilled person engaged by the firm in 2019, insufficient against the COBS 19 standards even before the FCA’s specific BSPS guidance.

The client in this study is a 56-year-old former plant operative with a deferred BSPS pension of approximately £19,000 a year at normal retirement age, a CETV of approximately £530,000, modest other savings, no significant other pension provision, and an attitude to risk consistent with cautious-balanced. The firm recommended transfer; the funds were placed in a SIPP invested in a balanced portfolio. By the time of the FCA’s intervention and the broader review of BSPS advice the client had drawn down approximately £80,000 from the pot.

The FCA established a dedicated BSPS consumer redress scheme under section 404 of FSMA — the only such scheme since the major mis-selling reviews of the 1990s. Firms that had advised BSPS members were required to review every transfer recommendation and pay redress where the advice fell short of the FCA’s standards.

The claim

Redress was calculated under the FCA’s specified methodology (a variant of the standard pension transfer redress calculation built around an updated set of assumptions specific to BSPS), with the client’s specific circumstances applied: scheme assumptions, gilt yields at the calculation date, the residual value of the SIPP, the income taken to date, and an annuity-purchase equivalent for the un-drawn portion.

For this client the calculated redress was approximately £225,000.

Across the firm’s BSPS book, redress assessments were made on every transfer file. Approximately 75% of the firm’s transfer recommendations were determined to have required redress. The aggregate redress exposure across the book came to approximately £8.6m.

How the policy responded

This is where the BSPS exposure separates from other DB transfer claims. The aggregate exposure across the firm’s book exceeded the primary PI limit of £2m. The firm’s wording at the time of the original advice had a per-claim limit of £2m and an aggregate annual limit of £2m. On the aggregation analysis, the BSPS cases shared features that supported a series-loss treatment under the wording in place — common methodology, common adviser, common review process — and the insurer asserted (in the firm’s favour for some purposes, against the firm for others) that this was a single series.

The £2m aggregate annual limit responded to the first tranche of redress payments. The balance fell outside cover. The firm itself, as a Small Self-Administered limited company, did not have the resources to meet the balance. The FCA’s redress scheme proceeded; the firm declined into administration and the Financial Services Compensation Scheme (FSCS) stepped in to meet the redress for the clients, recovering subrogated rights against the firm and (where available) other parties.

The FSCS BSPS levy and the broader sector response is the policy backdrop here: the cost of advice failures in the BSPS exercise has been spread across the IFA sector through FSCS levies over a number of years, materially impacting the cost of compulsory regulatory contributions.

Section 5 notification of the underlying complaint had been made promptly. The policy responded to its limit; it could not respond beyond it. The firm’s MGA-led wording at later renewals (after the BSPS book was identified as a risk) had become unobtainable in the standard market and was placed with material loadings and an aggregate exclusion for BSPS-related work.

The outcome

The firm wound up. The FSCS met the redress for affected clients. The PTS individually faced an FCA enforcement outcome with a fine and a prohibition order, consistent with the pattern of enforcement against advisers most heavily implicated in the BSPS pattern. The firm’s directors faced parallel regulatory consequences.

This is, frankly, a worst-case outcome and it is offered here as an illustration of how a concentrated exposure to a single advice cohort can overwhelm the standard PI architecture for an IFA.

Lessons for buyers

BSPS is a lesson in cohort risk. First, no IFA firm should accept a sudden, large book of homogeneous DB transfer work in a short window without active recognition that the resulting cohort risk may exceed its PI architecture. Second, the aggregation language on the firm’s PI wording is the single most important provision when cohort risk crystallises; the difference between per-claim and aggregate annual limits, and the application of series-loss wording, is the difference between continuing to trade and an FSCS event. Third, past-business reviews commissioned proactively are materially less costly — financially, regulatorily and reputationally — than reviews commissioned after the regulator has identified an issue. Fourth, IFA firms with a meaningful DB book should consider an excess-of-loss layer above the primary PI limit; the standard primary limit is often insufficient against cohort risk. Fifth, firms ceasing to write DB business should not assume that the run-off cover available to them in the market will mirror the cover they have today; tighter aggregate limits and aggregate exclusions are increasingly common.

How Apex would have helped

For BSPS-exposed firms, the broker’s role between 2017 and now has been to talk frankly with directors about cohort risk and to structure the PI tower with an aggregate limit and excess layer that genuinely matches the exposure. Where firms have managed the early stages of the FCA redress scheme well, with proactive past-business review and constructive engagement with the insurer, outcomes have been substantially better. Where firms have hoped the problem will pass, outcomes have been worse. The frank conversation early is the conversation that earns the broker’s fee.