The British Steel Pension Scheme (BSPS) should not be allowed to join the Pension Protection Fund (PPF) if it is permitted to sever ties with its sponsor, the lifeboat fund has insisted.
Responding to a government consultation on the future of the £13.6bn (€17.3bn) industry-wide pension fund for steel workers, which is considering cutting indexation in an effort to reduce the fund’s deficit, the PPF argued that allowing BSPS to remain eligible for compensation once it was no longer backed by a sponsor amounted to a “one-way bet” against those paying the PPF levy.
The PPF said that, in such a scenario, in the absence of Tata Steel or a viable follow-up entity sponsoring BSPS, the PPF and its levy payers would be directly underwriting the industry-wide fund’s investment risk.
“If the scheme remains eligible for the PPF, then, from the trustees and scheme members’ perspective, the impact of any such deterioration would be mitigated by the ability to trigger PPF entry at the point it was considered the scheme could no longer afford to pay benefits above PPF levels,” the lifeboat fund notes in its consultation response.
It continues that, if BSPS remains eligible, then the longer it stays outside the PPF, the greater the financial impact on the lifeboat fund could be, as the number of members above retirement age would increase – a point after which the PPF has to honour the full accrued benefit, rather than paying out only 90%.
It goes on to warn that, in allowing a bespoke arrangement for employees of the formerly state-owned steel industry, the UK government risks setting a precedent others will seek to emulate.
“Although the government […] has been at pains to stress the unique circumstances surrounding BSPS,” the PPF says, “we would nevertheless expect other employers or industries to seek similar arrangements to reduce their pension scheme liabilities – effectively transferring value from scheme members to shareholders.”
The discussion comes months after BSPS sponsor Tata announced its intentions to seek a buyer for its UK steel assets – with any potential suitor, it is argued, likely to be deterred by the cost of supporting BSPS.
The PPF’s response – which also warns that, even if BSPS pursues a low-risk investment strategy, it is not protected from “substantive” reductions in funding levels – is in marked contrast to one published last week by the trustees of British Steel.
Arguing the case for remaining as a standalone pension fund, the trustees said the approach involved “less cost and less risk for the PPF and its levy payers than immediate PPF entry”.
However, Allan Johnston, chair of trustees at BSPS, said his fund would be “most unlikely to go into the PPF any time in the future”.