What Is a Defined Benefit (DB) Pension?
A defined benefit pension — also called a final salary or career average pension — promises a specific income in retirement based on your salary and years of service. Unlike defined contribution pensions, the investment risk sits with the employer, not the employee.
Defined benefit pensions are often described as 'gold standard' retirement provision. They provide guaranteed income for life, inflation-linked increases, spouse and dependant benefits, and protection through the Pension Protection Fund if the sponsoring employer becomes insolvent.
What Is a DB Transfer and When Is It Mis-selling?
A DB transfer involves giving up your guaranteed pension income in exchange for a cash equivalent transfer value (CETV), which you then invest in a personal pension or SIPP. The transfer is irreversible.
The FCA has consistently stated that for most people, it will not be in their best interests to transfer out of a DB scheme. Consequently, DB transfer advice is subject to stringent suitability requirements under the Conduct of Business Sourcebook (COBS 19).
- Advisers did not assess attitude to risk or capacity for loss adequately
- Clients were not told about the value of the guaranteed benefits they were giving up
- Transfer values were inflated due to low interest rates — making transfers superficially attractive without adequate explanation of the risks
- Advice was provided by firms with insufficient expertise or by appointed representatives without proper oversight
- Advisers received commission or referral fees that created a conflict of interest
The British Steel Pension Scheme Scandal
The most high-profile DB transfer mis-selling case involved the British Steel Pension Scheme (BSPS). Between 2015 and 2018, approximately 8,000 BSPS members were estimated to have received unsuitable advice to transfer out of the scheme during a period of corporate restructuring.
The FCA's investigation found that the quality of advice was poor in many cases, leading to Policy Statement PS22/13 (September 2022), which established a dedicated consumer redress scheme requiring firms to review BSPS advice and pay compensation where it was unsuitable. The FCA estimated total redress in the hundreds of millions of pounds.
The FCA's PS22/13 methodology calculates redress based on the difference between what the claimant's pension would have been worth had they remained in BSPS2 and the actual value of their personal pension — adjusted for tax and charges.
How the FCA Suitability Standard Applies
Under COBS 19, an adviser providing DB transfer advice must: assess the client's attitude to transfer risk; calculate the critical yield needed to match the guaranteed benefits; assess the client's capacity for loss; consider all personal circumstances including health, dependants, other savings, and employment status; and document all of this in a suitability report.
Where an adviser fails any of these requirements, the advice is potentially unsuitable and gives rise to a compensation claim.