British Steel and the government’s Consultation Paper: Which Way Forward?

The government has released a Consultation Paper on the British Steel Pension Scheme. This article details the options tabled by the government and the response from the Trustees of the Pension Scheme.

21 June 2016

Tata Steel Limited (Tata) has been intending to end their British operations for some time. As yet, it has been unable to do so as its subsidiary, Tata Steel UK (TSUK), is the principal employer of one of the UK’s largest defined benefit (DB) schemes. The obligations and liabilities under the British Steel Pension Scheme (BSPS) have been deemed by prospective buyers as too great to take on with the Scheme currently running at a deficit of approximately £700 million. 

The objectives of the Consultation Paper are firstly, finding a way to separate the BSPS from its current sponsor and secondly, finding a new employer who would be willing to sponsor the Scheme. The Consultation Paper is part of a wider effort by the government to resolve the long term issues currently facing the British steel industry.

There are four options discussed within the Consultation Paper. Some of these options are specific to the current situation whilst others are deemed as more general and can be applied to other pension schemes. The four options tabled are as follows:

Option 1: Use existing regulatory mechanisms to separate the BSPS
In situations where an employer is at serious risk of being insolvent, a Regulated Apportionment Agreement (RAA) can allow for a separation of the employer from its pension scheme and the liabilities attached thereto. This agreement must be consented to by the Pensions Regulator and the PPF, both of whom must be satisfied that, amongst other things, a scheme would be better off moving to a new employer than in an insolvency situation. BSPS could seek to enter into a RAA to transfer the Scheme liabilities to a new employer. If BSPS were to separate from TSUK and the new employer was unable to fund the Scheme above PPF levels, the Scheme would enter the PPF following an insolvency event. However, if a new employer was able to fund the Scheme above PPF levels, there could be a buy-out above PPF levels or Scheme members could be offered the option to enter the PPF or, alternatively, to move to a new scheme with reduced benefits which remain above the PPF level.

Option 2: Payment of Pension Debts
This option, which is already commonly used, would be triggered by TSUK severing its relationship with the BSPS. Under current legislation, this would generate a debt known as the “employer debt” which requires to be paid. The sum of the debt would have to amount to enough capital for the Scheme to be able to buy annuities for all the employer’s members equal to the value of their total accrued pension rights. Tata have indicated that this option would not be affordable to TSUK.

Option 3: Reduction of the Scheme’s Liabilities Through Legislation
This option requires changes to be made to legislation. Currently, Section 67 of the Pensions Act 1995 prohibits changes to pension scheme rules which would diminish members’ benefits. The government could amend this legislation and exempt BSPS from following Section 67. This would allow the Trustees of the Scheme to make changes to the pension benefits, reducing the levels of indexation and revaluation on future payment of accrued pension rights. For members, this would mean a change from the higher RPI measure to the lower CPI in the calculation of their deferred benefits. In real terms, their pension payments would be reduced. However, the amount they receive would still be above the PPF level.

The Consultation Paper explicitly states that, whilst this proposal may be attractive to many pension schemes across the UK, there are very specific circumstances in this case which allow for the disapplication of Section 67. It appears the government are therefore reticent to extend this option to other DB schemes in the future. 

Option 4: Transfer to a New Scheme
The Trustees of the BSPS could arrange a bulk transfer of members benefits to a new scheme paying lower levels of benefits than the BSPS but better than would be available in the PPF. Normally this would require member consent. However, in the case of BSPS, the government intends to suspend the need for member consent. This is in part due to the difficulties which would be encountered with garnering consent from 130,000 members. In this way, the BSPS members would be transferred to a new scheme through existing mechanisms. The new scheme would then pay lower levels of indexation and revaluation to its members, thereby reducing its costs.

The Way Forward?
The Trustees of the BSPS have publicly supported Option 3: the disapplication of Section 67. They believe that these changes to the levels of indexation and revaluation on future pension benefits will mean that the Scheme remains self-sufficient and it will not fall under the PPF level of benefits. In a letter to BSPS members, the Trustees stated that these changes would be “in the best interests of the Scheme membership”. However, this option is not without its critics with many arguing that it will set a precedent for other DB pension scheme sponsors. In this way, the exceptional disapplication of Section 67 in this case could become the norm in the future, thereby lowering the level of protection that scheme members ultimately have over their pension benefits.