Tata Steel and the US Central States Pension Fund Compared

Gino Rocco writes for Pensions Age

Final salary pension schemes are in the press again. The current two big pension stories are the BHS Pension Scheme with its £571m deficit and the British Steel Pension Scheme (BSPS) with a whopping £700m deficit.

Unsurprisingly, members and unions are concerned at recent developments. The government has agreed to take action to assist the BSPS. This can be contrasted with the situation in the US where the US Treasury has refused a rescue plan for the Central States Pension Fund (CSPF) British Steel Pension Scheme.

BSPS is sponsored by Tata Steel UK Limited (TSUK), a company owned by Tata Steel Limited (Tata). TSUK has been running at a loss of £2bn over five years and in March 2016, Tata announced that it was unable to support this loss. However, a sale of the UK business is being hindered by the pension scheme’s deficit. Unless a buyer is found, thousands of jobs and a major industry may be lost. Pension scheme members also face drastically reduced benefits if the scheme falls into the Pension Protection Fund (PPF).

On 26 May 2016, the Department for Work and Pensions (DWP) published a consultation paper putting forward several options for helping the BSPS. In light of what the DWP sees as “exceptional circumstances”, it has proposed four options for separating BSPS from TSUK, to make TSUK more attractive to a buyer. Of the four options, the first two are unlikely to gain any traction.

Under option three, the BSPS trustees, with the support of Tata, have proposed changing the basis on which pensions in payment are indexed and deferred pensions are revalued. They believe that changing the inflation benchmark to Consumer Price Index will enable the scheme to pay pensions at current levels indefinitely.

However, this requires a rule amendment and will be subject to the statutory protection of section 67 Pensions Act 1995 which prohibits detrimental changes to accrued benefits. To get around this, the DWP has been asked to amend pension legislation to permit the trustees to reduce indexation and revaluation of members’ accrued rights. The DWP has said that the proposed change to legislation would be limited to these matters and that there would be safeguards to prevent further changes to accrued rights. That is welcome, but it does set a dangerous precedent.

The fourth option would allow trustees to transfer scheme members into a new successor scheme with reduced benefit entitlement, without having to obtain their consent. Again, this is presented as a one-off but does set a precedent.

Looking across the pond

A similar situation has arisen in the US in relation to the CSPF, a multi–employer industry wide pension fund that provides benefits on a final salary basis to workers in the unionised trucking/haulage industry. The industry was deregulated in the early eighties. With the onset of price competition, non-union carriers easily won business due to cheaper labour costs, causing the unionised trucking industry to decline sharply.

As a consequence, many participating employers left the CSPF and left their employees there. Faced with fewer employers paying into the fund and the economic crisis which started in 2008, the CSPF quickly ran into serious difficulty. The trustees asked the US Treasury to approve a rescue plan which included some changes to pension legislation but in May this year, this was refused.

In the US when a pension scheme fails it must rely on the Pension Benefit Guaranty Corporation (PGBC) as a safety net, not unlike the position in the UK with the PPF. However, the PGBC is itself projected to become insolvent, resulting in the loss of pension rights for many thousands of workers.

Looking forward

As the US case shows, doing nothing is not an option. The DWP’s proposals, whilst drastic and going against the grain of established pension law, should be considered carefully and with a long term view. Consideration should also be given to the wider legislation. For example, employers sponsoring a scheme which is in deficit could be restricted from making dividend payments. It is far better to address the deficit as it first arises, rather than letting it drift.

Some will say that there is already legislation to guard against this, but given the BHS scheme and the BSPS, arguably the current legislation is not working. The failure to deal with such large schemes in difficulty can be catastrophic, not only for the members but for the business or industry. There is no place for complacency in the UK, we would do well to learn the lessons from across the pond.

This article, written by Gino Rocco, originally appeared in PensionsAge at http://www.pensionsage.com/pa/GUEST-COMMENT-Tata-Steel-Goodbye-pension-scheme.php