Sections

UK government floats controversial Tata Steel pension proposal

Related Categories

The UK government may legislate to allow the defined benefit (DB) scheme of Tata Steel’s UK business to change its indexation rate, a move that has triggered warnings of setting a “dangerous precedent” given concerns about the funding situation of many other DB occupational pension schemes.

The work and pensions secretary Stephen Crabb today launched a consultation on four options on how the £13.3bn (€18bn) British Steel Pension Scheme (BSPS) could be separated from its sponsor, Tata Steel, to facilitate a sale of the latter’s UK assets and thereby avoid its closure.

The BSPS has a technical deficit of some £700m, and a funding deficit of around £1.5bn on a section 179 basis  – the amount of money that would need to be paid to an insurer to take on the compensation the Pension Protection Fund (PPF) would make if it took over the scheme. 

One of the options put forward by the government was for it to amend the law to allow the BSPS trustees to change how pensioners’ benefits are indexed – from the retail prices index (RPI) to the generally lower consumer prices index (CPI) – as a means of cutting the scheme’s long-term liabilities.

The proposal is “unprecedented”, said Richard Farr, managing director at Lincoln Pensions, a pensions advisory business.

“It is another reality check of the real pressure faced by companies trying to stay afloat and at the same time honour previous benefit promises,” he said.

At the moment, it would be illegal for the BSPS trustees to make the change.

As noted by the government in its consultation, under existing law, a scheme’s trustees or sponsoring employer cannot reduce accrued pension rights without member consent, and unilateral changes to benefits are not allowed if they are detrimental to members’ rights.

“To make the proposed changes,” the consultation document reads, “the government would therefore need to make regulations allowing the scheme to step outside the normal regulatory framework by making the changes without individual member consent.”

CPI has been the index for statutory pension increases since 2011.

A move from RPI to CPI would reduce Tata Steel’s pension liabilities by £1.5bn, noted Hymans Robertson, the pensions and benefits consultancy. 

The proposal has triggered warnings that going down that route would set a “dangerous precedent” – the wording used by Angela Eagle, a Labour member of Parliament and former pensions minister, in a parliamentary debate today. 

Clive Fortes, partner at Hymans Robertson, also described it as such, calling for clarity from the government with respect to its reported intention for any such move to happen only in an emergency.

The Pensions and Lifetime Savings Association (PLSA), meanwhile, has urged caution. 

Commenting before details of the government’s consultation had been revealed, Joanne Segars, chief executive at the PLSA, said: “The government must think this over most carefully, and we will be glad to work with them on this issue.”

Whilst acknowledging the BSPS had a role to play in efforts to rescue Tata Steel’s UK business, Segars said the government needed “to be alert to the fact their actions in this issue could affect not only the members of the British Steel pension scheme but also the millions of other UK savers in defined benefit pension schemes”.

“Trustees,” she added, “play a crucial role in safeguarding the interests of scheme members, and that protocol must be maintained in any reform.”

The government noted that other companies with DB schemes were concerned about the size of their liabilities and the possible impact on their sustainability as a business, but it emphasised that there were “very specific circumstances” surrounding Tata Steel’s UK business and the BSPS.

“We are not, therefore, considering extending the proposal beyond the BSPS as a specific scheme,” it said.

Speaking in the House of Commons earlier today, the business secretary Sajid Javid emphasised that the proposal came at the behest of BSPS trustees – “a product of the scheme trustees approaching us directly”.

Allan Johnston, chairman of the BSPS board of trustees, welcomed the government’s decision to consult on changes to the law applying to the scheme.

“The trustee will be writing to members over the coming days to make clear its belief that, with government support, it should be possible to modify benefits so as to allow the scheme to remain outside the Pension Protection Fund indefinitely and on a low-risk basis,” he said.

“Although this would entail future pension increases being cut back from their current levels, benefits would be more generous than those provided by the PPF for the vast majority of scheme members.”

One of the other three options the government is consulting on would also involve legal changes, this time aimed at allowing the government to introduce regulations that would in certain cases allow liabilities to be transferred to a new scheme with reduced benefits without individual consent.  

Have your say

You must sign in to make a comment

IPE QUEST

Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2474

    Asset class: All/Large Cap Equities.
    Asset region: Global Developed Markets.
    Size: $150m.
    Closing date: 2018-09-25.

Begin Your Search Here