The steely face of pensions

21 / 07 / 2016

On 26 May the Department of Work and Pensions issued a public consultation on the British Steel Pension Scheme (the “BSPS”).

Why has this come about? It is all connected to the attempt to of Tata Steel, to sell its UK business.  Understandably potential buyers are being scared away by the enormous deficit in its pension scheme.  Despite this, it has reportedly had seven expressions of interest, but these have been put on hold whilst the Indian company seeks partnering up with a German manufacturer.  It is widely understood that the interest it has received has been on the basis that it be separated from the BSPS and its significant funding deficit.

Many will sympathise with the position of the employer and indeed the trustee of the scheme as the majority of final salary schemes in the UK face significant funding deficits.  Indeed, the government is taking a particularly sympathetic approach and is considering several options with a view to helping alleviate the pressure on this part of the UK’s steel industry:

A: 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.

B: Separation of the BSPS from Tata Steel

Tata Steel cannot walk away from the funding deficit, estimated at £700million, unless a replacement sponsoring employer agrees to take on the BSPS liabilities.  It is difficult to imagine any company taking on such liabilities of its own accord.  This proposal therefore involves the use of 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“. – Clearly good news for all those schemes reluctantly paying ever-increasing PPF levies!

C: 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, claiming that:

BSPS was set up in 1990 on the basis that future pension increases could be reduced if they were no longer affordable. Subsequent legislation that was designed to protect members;’ accrued rights is now an obstacle to securing the best outcomes for BSPS members“.

Section 67 of the Pensions Act 1995 limits the circumstances in which the Rules of a scheme can be amended in a way that may be detrimental to members’ benefits. In such circumstances detrimental modifications may be made where either:

  • actuarially equivalent benefits are offered; or
  • the individual member consents (the “informed consent route”).

Based on the argument of Tata Steel and the Trustee of the BSPS that most members would be better off under their proposed changes than if the scheme transferred to the PPF on the face of it the “informed consent route” might appear feasible. However, when you consider that

  • the scheme has approximately 130,000 members;
  • the informed consent route is prescriptive and not straightforward; and
  • some members (albeit a minority) may be worse off as a result of the proposed changes compared to benefits payable under the PPF.

It becomes clear that this option may not be that attractive.

An interesting option would be to seek informed consent from all members and only make the change for the specific members who did provide informed consent. It would be administratively cumbersome but may go some way to helping them achieve their objective. Arguably all members could win out of that situation. Perhaps that could be a last ditch consideration if the government refuses to make any of the changes requested!

The changes being considered by the government are changes that many sponsoring employers would be delighted to welcome. However the government has made it abundantly clear that if it does go down the route of amending section 67 such amendments will be strictly limited to the operation of the BSPS.

Whilst it would seem that this could be a dangerous approach in terms of opening the floodgates for other schemes the government has made it clear that it is only considering this option in respect of the BSPS because of the very specific circumstances and the government’s goal of minimising the impact on the steel industry, members of the BSPS and the affected region.

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.

D: Transfer to another scheme

In order for this proposal to be affordable the receiving scheme would need to provide a lower level of benefits for members than under the BSPS.

The argument in favour of this approach is that most members would receive benefits in excess of the benefits they would receive if the BSPS transferred to the PPF.  In BSPS’ response to the consultation on 16 June it stated that around 58,000 members who are aged below 65 would see a reduction of at least 10% to their benefits if the BSPS transferred to the PPF.

Effecting a transfer to a scheme with lower benefits 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.

The consultation ended on 23 June and we await the results.