5.7.10: Official Definition
A permanent failure is one which is not likely to be resolved by resending the message in the current form. Some change to the message or the destination must be made for successful delivery.
This indicates that external strong privacy layer is needed in order to use the requested authentication mechanism. This is primarily intended for use with clear text authentication mechanisms. A client which receives this may activate a security layer such as TLS prior to authenticating, or attempt to use a stronger mechanism.