British Steel’s proposed changes raise difficult questions
Discrepancies between the government’s recommendations for how BSPS should proceed and the scheme’s proposed alterations to its rules might make reaching a decision about its future on June 23 harder.
On June 16 BSPS issued proposed modifications to the scheme, which it said would allow it to stay out of the Pension Protection Fund and would require a separation from Tata Steel UK. To implement this, the government would have to agree to change current legislation to allow the scheme to take action without its members’ consent.
The government is hesitant but not categorically opposed to changing the legislation for two reasons: it is not sure that the modifications would ultimately keep BSPS out of the PPF in the long term; and other struggling schemes might demand the same right to circumvent member consent, citing BSPS as a precedent.
The fairest outcome
In their official response, BSPS trustees stated that while “the PPF is an important safety net for pension schemes”, it “would not be the best or fairest outcome for BSPS members”, because of the scheme's "relatively good funding position".
The trustees added they “expect to be able to demonstrate long-term self-sufficiency” if allowed to remain outside the PPF for at least the next 10 years, and that their proposals would mean less cost and less risk for the PPF and its levy payers.
"Our proposals would reduce BSPS liabilities so that BSPS is fully funded on a self-sufficiency basis and can operate indefinitely as a standalone scheme, outside the PPF, providing better benefits than PPF compensation," they said.
The trustees concluded: “We welcome the proposals in the consultation document and the government’s willingness to help us with our objective of achieving the best outcome for the BSPS membership.”
Exceptionalism concerns
Rosalind Connor, partner at Arc Pensions Law, said that in themselves, the proposals to change scheme rules and separate a scheme from its sponsoring employer are not contentious, as both have been done before.
A bigger challenge, she said, is that conflict might arise if the government resists extending legislative exemptions to other schemes. She remarked that the “unique nature” of BSPS’s challenges “appears to largely be about being bigger than other schemes, which does not chime well with employers, trustees and members of small schemes with exactly the same issues”.
However, she conceded that for a scheme of BSPS’s proportions, it may be very difficult to track down all members, including many former Tata Steel employees, for a response.
Connor pointed out that switching to the consumer price index is too narrow a solution. “It doesn’t deal with the issues that people are living longer and there is uncertainty and cost around that,” she said.
She added that BSPS’s proposal not to use any future surplus to reward employers or sponsors is reasonable, since this practice is becoming increasingly obsolete, and that redirecting it towards member benefits seems like “the sensible route”.
Find a halfway house
Faith Dickson, partner at pensions law firm Sackers, said while “the consultation is largely about making changes to alleviate the situation for British Steel, the discussion needs to be bigger.” She added that it should consider all pension schemes affected by a difficult economy.
She said the BSPS trustees are right to prioritise staying out of the PPF, as it would mean “significant gains” for a large proportion of members, specifically those below pension age.
Dickson also expressed confidence in the trustees’ proposal to switch to the cheaper CPI to calculate deferred benefits. “There will be a balancing point at which the reduction of liabilities will offset other risks,” she said.
The most significant issue in the consultation, Dickson said, is perhaps member consent. “More flexibilities are needed for trustees to be able to reshape benefits,” she said, as even in smaller schemes, “it is not sensible to have the outcome for everyone depend on individual consent”. However, Dickson pointed out, “it is unappealing to change people’s benefits without their consent”.
The consultation is therefore considering another option: transferring people to other schemes, and letting them opt out if they wish, or 'bulk transfer'. “This is a better halfway house than writing members out of the decision process,” said Dickson.