Unions reluctantly back BSPS closure proposal

The proposals outlined describe closing the scheme to future accrual and cutting benefits while still keeping them above the levels offered by the Pension Protection Fund. Members would then be moved into a defined contribution scheme to accrue further benefits.

The proposed changes offer benefits similar to those of the PPF, with more generous terms around some spouses' pensions and future increases.

The BSPS already provides a DC section for new members, requiring a 6 per cent member contribution and 4 per cent from the employer.

Tata Steel’s proposals also include the separation of the employer from the pension scheme through the use of a regulated apportionment arrangement, which allows them to separate in circumstances where the employer otherwise faces insolvency. In order to be granted an RAA, the employer requires the approval of the trustees, the Pensions Regulator and the PPF.

A spokesperson for the regulator said: “We continue to have discussions with the employer and the trustees about the future of the British Steel Pension Scheme. There are still significant issues to be resolved and we will consider any proposals carefully in light of their impact upon the 130,000 pension scheme members and PPF levy payers.”

Bitter pill to swallow

The government’s consultation document in May last year laid out a number of options for separating the BSPS from Tata Steel, all of which involved closing the scheme to future accrual.

In a letter to members of the scheme, trustee chair Allan Johnston said: “Closure is therefore necessary to achieve separation, and it would be an inevitable consequence of Tata Steel UK insolvency.”

“If the only alternative is TSUK insolvency, the trustee would wish to agree separation terms that offer members a choice between staying in the BSPS (and so getting PPF compensation) and transferring to a new scheme that would provide modified benefits. For the vast majority of members and pensioners, these modified benefits would be better than PPF compensation.”

In a joint statement, unions Unite, GMB and Community sounded a sombre note while encouraging members to vote for the proposals, describing them as “the only credible and viable way to secure the future”.

“Nobody is saying that the proposal on the table is without issues… Although this is a situation that we would never have wished for, it is also the only way to protect the benefits you have already accrued and to provide a chance to prevent the BSPS free-falling into the PPF.”

The statement goes on to point out that voting against the proposals would not prevent the closure of the scheme.

Terminal situation for DB?

Commenting on the news, Hugh Nolan, president of the Society of Pension Professionals and director at consultancy Spence & Partners, said: “DB is dead in the private sector.”

He said the challenges boiled down to three main reasons: low investment returns, benefit increases and growing longevity among retirees.

“Falling yields mean higher annuity costs. [There are] lower investment returns than in the 1980s when people were making these promises. You can’t grow your money fast enough,” he said.

This was complicated by the introduction of revaluation in 1985, he added, making liabilities grow as benefits were indexed to inflation.

“The pension scheme is a millstone around the company’s neck,” Nolan said. “I see it going more and more this way.”

Speaking about the proposal to close the BSPS to future accrual, he said: “It’s a horrible situation and the lesser of two evils. The union agonised over it, but I think they made the right [choice]; you can’t buck economics.”

Richard Farr, managing director at covenant specialist Lincoln Pensions, went further, saying that closure to future accrual would be insufficient to repair the deficit in the scheme, and raising the prospect of changes to historic pensions.

“It’s clear from the size of the deficit the support for the scheme is not big enough,” he said, adding the caveat that if the decision to reduce benefits were taken, it would require the consent of members in order to legally go ahead.