Tata Steel - Goodbye pension scheme?


7 mins

Posted on 07 Jun 2016

As far as topical subjects go, after the debate on Brexit, arguably pensions and more specifically, pension schemes with final salary benefits, are receiving extensive press coverage.

The current two big pension stories are the BHS Pension Scheme with its £571m deficit and the British Steel Pension Scheme (BSPS), sponsored by Tata Steel UK Limited (TSUK), with a whopping £700m deficit (roughly). Not insignificant sums. Readers do not need to be pension geeks to understand that a pension scheme deficit arises because the cost of providing members with the promised pension benefits is higher than the value of the assets available. The more technical reader will know that a final salary pension is in essence deferred pay which is promised to you at retirement, so taking it away or reducing it feels like theft. Unsurprisingly, members (and unions) are concerned at recent developments.

British Steel Pension Scheme

TSUK is a company owned by Tata Steel Limited (Tata). TSUK underwrites the BSPS, a final salary pension scheme. TSUK has been running at a loss of £2 billion over 5 years. In March 2016, Tata announced that it was unable to support such a loss. Selling the UK business hinges on the pension scheme’s deficit, estimated at around £700m if calculated on an ongoing basis and around £7.5billion on a buy-out. Those price tags are unlikely to make any buyer want to purchase TSUK, so no wonder there have been no takers. Unless a buyer is found, the risk is the loss of thousands of jobs and a major industry. Pension scheme members also face drastically reduced benefits if the scheme falls into the Pension Protection Fund (PPF). 

What to do? The government has agreed to step in. On 26 May 2016 the Department for Work and Pensions published a consultation paper putting forward several options for helping the BSPS, as part of a wider government package of support for the steel industry. In light of what the DWP sees as “exceptional circumstances”, it has proposed several options for separating BSPS from TSUK so that TSUK becomes more attractive to a buyer. 

Pension lawyers and other professionals within the pension industry will of course know that we already have reams of complex legislation designed specifically to avoid the situation of a pension scheme being abandoned to the PPF, a state backed but not state funded safety net. However, judging from the DWP consultation, there are exceptions. Rather than embark on a detailed analysis of the different options proposed by the DWP, it is better to understand the bigger picture. Of the four options, the first two are unlikely to gain any traction. The first is using an existing regulatory mechanism which essentially requires a new employer to agree to take on the liabilities and requires the agreement of the Pensions Regulator, so highly unlikely given the size of the deficit. The second is crystallising the debt, that is, TSUK can trigger the debt by winding-up the scheme, and pay it. Again, given the size of the debt, this is unlikely to happen.

This leaves options three and four. 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. Changing the inflation benchmark to Consumer Price Index would, according to the trustees, enable the scheme to pay pensions at current levels indefinitely. For many schemes, changing the inflationary index can be done without using the amendment power but that depends on their rules. The amendment power is subject to the statutory protection of section 67 of the Pensions Act 1995, which prohibits detrimental changes to accrued benefits. It appears that the BSPS requires a rule amendment in order to change its inflation benchmark, thus bringing any change under the protection of section 67 and the prohibition on 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.

Whilst drastic action is needed in the case of BSPS to safeguard not only the pension scheme benefits but the whole of the steel industry, the concern amongst pension lawyers, and which the writer shares, is that these are far reaching changes and should not be rushed through as an emergency measure without proper consideration of the long-term consequences.

Looking across the pond

In considering these issues, those involved in the consultation process should use as a useful reference the US case of the Central States Pension Fund (CSPF), as the circumstances and facts are very similar to those being experienced by Tata and the BSPS.

Briefly, the CSPF is a multi–employer industry wide pension fund that provides benefits on a final salary basis. In this case the industry was unionised trucking/haulage which was deregulated in the early 80s. As was observed by commentators at the time, 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. Coupled with that there was no legal requirement to safeguard the pension scheme. Faced with fewer employers paying into the fund and the economic crisis which started in 2008, the CSPF quickly ran into serious difficulty. In response, the trustees asked the US Treasury to approve a rescue plan but in May of this year the Treasury announced that it had refused the CSPF rescue plan. 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. The effect of all this inaction is the loss of pension rights for many thousands of workers. The symptoms are very similar to the BSPS case, an industry in decline, a workforce with good pension benefits but a fund in great deficit, no action taken and so on. We would do well to learn from the US and avoid a similar scenario for BSPS.

Looking forward

As the US case shows, doing nothing is not an option. The DWP’s proposed changes to legislation, whilst drastic and going against the grain of established pension law, should be considered carefully and with a long term view. As part of that process consideration should be given to the wider legislation, rather than just the transfer and section 67 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 and hot headedness. That perhaps can be reserved for the debate on Brexit.

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