Public consultation begins on pension options for Tata Steel rescue plan

Posted by John Hamilton on
In recent weeks, there has been a great deal of media focus on the unfortunate and evolving pension situation at Tata Steel UK. We set out below some of the pension issues that arise from the attempts to rescue the business

On 26 May, the Government commenced a public consultation on actions that would allow the Tata Steel UK business to separate from the British Steel Pension Scheme, making it more attractive to buyers.  Some of the options being considered will result in a reduction of accrued benefits to members. The specific options being considered are based on proposals made by the Tata UK and the British Steel Pension Scheme Trustees.

The existing legal framework already exists to give effect to two of the four options outlined in the consultation document. The remaining two options are new and will require legislative changes before they can be implemented.

Option 1Transfer the scheme to a new employer. This would normally trigger a “section 75” debt on the employer but this could potentially be waived by the Pensions Regulator through what is called a Regulated Apportionment Arrangement.  Since the British Steel Pension Scheme is funded below Pension Protection Fund (PPF) levels, the scheme could still fall into the PPF if the new employer became insolvent. The Regulator would therefore need to determine the terms under which they would agree to any such apportionment and would need to demonstrate that this would be a better deal for members when compared to immediate insolvency and entry into the PPF. 

Option 2Payment of pension debt. Tata could pay the full exit debt, or a reduced debt sufficient to provide benefits above PPF levels.  Whilst this option is included in the consultation document, in practice, we suspect it is a theoretical option insofar as the consultation also recognises that Tata Steel has confirmed this is unaffordable.

Option 3 – Reduce benefits through targeted legislation.  In particular the proposal would be to allow the British Scheme Pension Scheme to cut back on how it increases pensions in both deferment and in payment. The proposal is to cut back increases to statutory minimum levels.  In order to achieve this, it would be necessary dis-apply the statutory protection afforded to accrued rights and entitlements under section 67 of the Pensions Act 1995. The objective of the benefit reductions would be to enable the Scheme to run as a going concern.

Option 4 – A bulk transfer to a new scheme. Members could be offered a new scheme with a new benefit designed such that a) benefits are higher than PPF levels and therefore members have an incentive to transfer when the alternative is entering the PPF; and b) benefits are sufficiently below current benefit level so as to enable the Scheme to be run on as a going concern. There is a precedent for a scheme restructuring of this nature albeit with member consent (for example, in relation to the Kodak Scheme). However, the Trustees of the British Steel Pension Scheme believe that obtaining consent from all members will be impractical given its size. The Government is therefore consulting on whether a transfer can be made by default without consent – although members would be able to opt-out of the transfer.

It is not clear at the moment what impact these proposals will have on other pension schemes. The new powers under the proposed Option 3 would only apply to the British Steel Pension Scheme and not on a more general basis. The consultation is clear that it does not intend to extend this to other schemes. The option 4 changes are similarly only proposed to apply to large schemes (more than 100,000 members).

If either of the new options are implemented, it could nevertheless lead to industry pressure for wider reform. Employers and schemes faced with a potentially unaffordable pension deficit ought therefore to watch the situation with interest. There could be scope for further special cases in the future and there is a case for extending new powers to other industries, or making the existing options easier to explore and implement. Equally, trustees will also want to take care that these options are not abused.

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John advises corporate and trustee clients on pensions law and is a director of Blake Morgan's Pension Trustees Limited, the firm’s independent trustee company.

John Hamilton
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