News: Pension changes key to UK steel industry's future
The Government has launched a consultation on changes to the British Steel Pension Scheme (BSPS) - the huge pension liability with a £700m deficit that could be a deal-breaker for prospective buyers of Tata Steel's UK assets.
The consultation follows intense discussions between Tata Steel, the UK government, the pension scheme trustees and regulators to find the best option for members of the scheme.
At the end of March, the Indian-owned steelmaker concluded that it is exploring all options for portfolio restructuring including the potential sale of Tata Steel UK, in whole or in parts. The formal process began on April 11.
The consultation is seen as the first step in a potential unprecedented change to regulations which would enable the scheme to modify its benefits enabling it become self-sustaining and remain outside of the Pension Protection Fund - the safety net that provides compensation to members of eligible defined benefit pension schemes when things go wrong.
The scheme has 130,000 members. Of these, 14,000 are active (i.e. they are currently employed by Tata Steel or another sponsoring employer of the scheme), 32,000 are deferred (i.e. no longer employed by Tata Steel but below the scheme's normal pension age and with a pension not in payment) and 84,000 are pensioners.
The consultation states that: "According to December 2015 figures, the scheme has assets of £13.3 billion and liabilities based on running on with a solvent sponsoring employer of around £14 billion, so has a deficit estimated at around £700m on a technical provisions basis. However, the scheme is around £1.5 billion short of what would be needed to buy out benefits equivalent to Pension Protection Fund compensation levels (this is known as a section 179 basis in pensions legislation). The deficit to buy out the benefits in full is estimated to be around £7.5 billion."
Proposed changes would enable the Government to cut billions from longer term liabilities by switching the indexation of pension increases from the RPI inflation index to the usually lower CPI measure.
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The consultation adds: "Were Tata to sell Tata Steel UK, it is highly unlikely that a purchaser would be willing to take on the pension scheme as a part of the deal – the cost and risk to the purchaser would be too high for a successful sale. The scheme therefore needs to be separated from Tata Steel UK."
Tor Farquhar, human resources director for Tata Steel's European operations, said: "This is an important step forward which would enable a better outcome for the vast majority of members of the British Steel Pension Scheme than the benefits provided by the Pension Protection Fund. The consultation is also an important step that supports the prospect of securing a sustainable future for Tata Steel UK’s 11,000 employees."
The steel trade unions – Community, Unite and GMB issued a joint statement: "It is important that all stakeholders continue to explore all available options that avoid the need for the scheme to go into the PPF, which would be the worst deal for scheme members. We will seek to work constructively with the UK Government and the scheme trustees to deliver the best possible deal for our members. We need to ensure that there are cast iron safeguards in place so this unique situation does not result in employers dodging their pensions responsibilities.
"It is important to remember that Tata Steel remains the employer and sponsor of the BSPS. They have significant legal, social and moral responsibilities with regards to the British steel industry and those men and women who have worked and continue to work within it."
Strike action at Tata Steel was averted last year when members of all four unions at Tata Steel voted to accept changes to the BSPS which saw the scheme remain open.
Tata Steel website
Images: Tata Steel
The consultation follows intense discussions between Tata Steel, the UK government, the pension scheme trustees and regulators to find the best option for members of the scheme.
At the end of March, the Indian-owned steelmaker concluded that it is exploring all options for portfolio restructuring including the potential sale of Tata Steel UK, in whole or in parts. The formal process began on April 11.
The consultation is seen as the first step in a potential unprecedented change to regulations which would enable the scheme to modify its benefits enabling it become self-sustaining and remain outside of the Pension Protection Fund - the safety net that provides compensation to members of eligible defined benefit pension schemes when things go wrong.
The scheme has 130,000 members. Of these, 14,000 are active (i.e. they are currently employed by Tata Steel or another sponsoring employer of the scheme), 32,000 are deferred (i.e. no longer employed by Tata Steel but below the scheme's normal pension age and with a pension not in payment) and 84,000 are pensioners.
The consultation states that: "According to December 2015 figures, the scheme has assets of £13.3 billion and liabilities based on running on with a solvent sponsoring employer of around £14 billion, so has a deficit estimated at around £700m on a technical provisions basis. However, the scheme is around £1.5 billion short of what would be needed to buy out benefits equivalent to Pension Protection Fund compensation levels (this is known as a section 179 basis in pensions legislation). The deficit to buy out the benefits in full is estimated to be around £7.5 billion."
Proposed changes would enable the Government to cut billions from longer term liabilities by switching the indexation of pension increases from the RPI inflation index to the usually lower CPI measure.
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The consultation adds: "Were Tata to sell Tata Steel UK, it is highly unlikely that a purchaser would be willing to take on the pension scheme as a part of the deal – the cost and risk to the purchaser would be too high for a successful sale. The scheme therefore needs to be separated from Tata Steel UK."
Tor Farquhar, human resources director for Tata Steel's European operations, said: "This is an important step forward which would enable a better outcome for the vast majority of members of the British Steel Pension Scheme than the benefits provided by the Pension Protection Fund. The consultation is also an important step that supports the prospect of securing a sustainable future for Tata Steel UK’s 11,000 employees."
The steel trade unions – Community, Unite and GMB issued a joint statement: "It is important that all stakeholders continue to explore all available options that avoid the need for the scheme to go into the PPF, which would be the worst deal for scheme members. We will seek to work constructively with the UK Government and the scheme trustees to deliver the best possible deal for our members. We need to ensure that there are cast iron safeguards in place so this unique situation does not result in employers dodging their pensions responsibilities.
"It is important to remember that Tata Steel remains the employer and sponsor of the BSPS. They have significant legal, social and moral responsibilities with regards to the British steel industry and those men and women who have worked and continue to work within it."
Strike action at Tata Steel was averted last year when members of all four unions at Tata Steel voted to accept changes to the BSPS which saw the scheme remain open.
Tata Steel website
Images: Tata Steel
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