Tata steel crisis: what next?

03 / 11 / 2016

Relaxing legislation: will the government take a steely approach?

On 26 May 2016 the Department for Work & Pensions issued a Public Consultation on the British Steel Pension Scheme (the “BSPS“).  This followed a request from the sponsoring employer (Tata Steel UK) and the Trustee of the Scheme for various proposals to be considered.

Why the request?

The Indian company which owns Tata Steel UK Limited (“Tata Steel“) wants to make it more attractive to potential buyers. Tata Steel currently employs around 11,500 people, with the Port Talbot steel plant employing over 4,000 people.

Why is the government considering the request?

The UK steel industry is in decline (Tata Steel UK says losses of £2bn have been incurred over the last five years) and the government is keen to bolster the steel industry where possible. The government is very conscious that steelworks tend to involve whole communities and focus on concentrated pockets of the population. With this in mind the government is nervous of (i) the impact of large scale job losses; and (ii) the potentially large impact of any reduction in pension income that the 130,000 BSPS members may suffer.

What are the proposals?

Ultimately Tata Steel’s goal is to separate itself from the BSPS in order to make the business an attractive proposition to prospective purchasers.

Proposal 1: Separation of the BSPS from Tata Steel

In light of the funding deficit, estimated at £700million, Tata Steel will not be permitted to walk away from the Scheme unless it finds a replacement sponsoring employer to take on the BSPS liabilities.  It is difficult to imagine any company taking on such liabilities of its own accord.  A potential way of facilitating this is to use a regulated apportionment arrangement (an “RAA“).   RAA’s can only be used where a scheme is already in a Pension Protection Fund (the “PPF“) assessment period, or is about to enter one.  In order for an RAA to proceed:

  • the Pensions Regulator must think it is a reasonable course of action;
  • the Pensions Regulator’s approval is required; and
  • the PPF must confirm it does not object to it.

In the PPF’s response to the public consultation it states that “whilst the scale of BSPS is significant, a claim on the PPF would be manageable without – in itself – triggering an increase in the PPF levy“. – Good news for all those schemes reluctantly paying ever-increasing PPF levies!

Proposal 2: Payment of pension debts

Tata Steel have indicated that this option is not possible following:

  • £1.5billion investment in capital expenditure;
  • Several billion invested in operational and working capital support; and
  • No dividend having been taken.

Proposal 3: Reduction of the Scheme’s liabilities

Tata Steel and the Trustee of the BSPS have asked the government to consider amending section 67 Pensions Act 1995 to enable them to amend the rules of the BSPS to facilitate a reduction in future pension increases and revaluation to the minimum required by law.

Even if this proposal were adopted and legislation was amended, BSPS would still need to find a new sponsoring employer (as it is anticipated that such benefits would exceed PPF benefits, meaning the BSPS would remain outside the PPF, at least for the time being).  The PPF have commented that it does not want to be used as an underwriter for risk and that if BSPS is allowed to run with a shell company as its sponsoring employer action would need to be taken to limit the potential impact on PPF members and levy payers.

Proposal 4: Transfer to another scheme

In order for this proposal to be successful the receiving scheme would need to provide a lower level of benefits for members than under BSPS.  Effecting this via member consent would be cumbersome and 100% member acceptance would be very unlikely.  The alternatives are:

  • to offer Members the option of joining the new scheme, albeit with reduced benefits, leaving the remaining Members in BSPS which would inevitably have to transfer to the PPF – this mirrors the approach recently approved under the Halcrow Pension Scheme.Pension Regulator agreement would be required before this avenue could be adopted; or
  • to effect a bulk transfer. A bulk transfer without member consent to a scheme offering reduced benefits is prevented by legislation in its current form, an amendment to legislation would therefore be required to facilitate such a bulk transfer.

Could other schemes benefit from any changes made?

Reportedly three quarters of UK final salary schemes have a funding deficit and many are stuck with paying overly generous increases and revaluation due to nuances in the way their governing rules were drafted, often decades ago. It is therefore easy to foresee the excitement the proposed changes to legislation may trigger.  However, it has been made very clear that any legislative changes would solely apply to the BSPS due to the “severity and exceptionality of the situation”.

Most schemes’ challenges would be likely to fail.  Although it is not without doubt that there could be similar requests from other large schemes in other failing industries which the government is keen to support.  In 1952 the UK’s exports contributed a quarter of all global exports.  Whilst the steel industry has been making headlines in recent years there are likely to be other industrial/manufacturing employers which may be seen to be a worthy cause.

This article was first published in Pensions World on 3 November 2016.