As the UK faces the prospect of its steel industry winding down, attention has focused not only on the possibility of a temporary nationalisation of some of the assets owned by Tata Steel but also on the fate of the British Steel Pension Scheme (BSPS), sponsored by Tata. With £14bn (€19bn) in assets this time last year, BSPS is one of the UK’s largest pension funds – and hardly unique in reporting a deficit. It is this shortfall – £553m on an ongoing basis in 2011 and nearly £1.2bn by 2013 – that means the scheme will play a material part when it comes to settling the future of steel manufacturing in the UK.
Some have quipped that Tata’s UK business is a pension fund producing steel, a joke often used when pension obligations are viewed as overwhelming. This perception – however mistaken it may be when part of the funding difficulties are simply down to the low-interest-rate environment – has led to suggestions that the government should take on responsibility for the pension fund, including from former secretary of state for business Vince Cable.
Cable’s intervention is notable. It was under his tenure that the government took on the majority of Royal Mail liabilities, in an attempt to make the company more attractive to private investors ahead of its flotation in 2013. The listed company was left with significantly less pension liability and a pension fund in surplus, while the remaining liabilities became part of government expenditure. “What Western government would not want £15bn of ready money now in return for guarantee of pensions payable over 50 to 80 years,” says Martin Jenkins, head of pensions at law firm Irwin Mitchell.
It is questionable whether such a step would be possible, or appropriate, in the case of a private-sector company, as it could amount to state aid. However, the other possibility would be for BSPS to fall into the Pension Protection Fund (PPF), a precedent already established when the UK coal industry encountered problems.
The two industry-wide pension funds for the coal industry entered the lifeboat scheme as part of a wide-ranging restructuring of its sponsor in an attempt to keep coal mining viable in the UK. As part of the agreement to sever ties with its sponsor, UK Coal, the funds were granted a controlling stake in a new property venture. But attempts to keep the industry viable were scotched by a fire in one of the remaining coal pits.
So, the absorption of the BSPS into the PPF would not be without precedent, but for the Pensions Regulator (TPR) to agree to such a move, Tata would probably need to offer a reasonable (and costly) settlement to the trustees.
The trustee board has so far remained quiet about Tata’s selling out of the UK, only saying that it would expect the company to “discuss [.…] the implications” of any sale or restructuring. The government must now proceed carefully. TPR’s independence must be preserved, and no impression given that either the regulator or the PPF was asked to agree to a deal that would be detrimental to those already in the PPF.
While the PPF is well-funded – in March 2015 it reported a £3.6bn surplus – the desire to keep an ailing industry open and avoid the significant unemployment that would result from the collapse of the UK steel industry must not lead to an outcome that looks like a sponsor dumping its pension obligations – precisely the scenario current regulation is meant to avoid.