Switching BSPS indexation to CPI could set legal precedent

Announcing the consultation in the House of Commons on Thursday, business secretary Sajid Javid said it was “to deliver clarity and security for British Pension Scheme members” and followed representations from BSPS trustees and parent company Tata. 

He said: “The objective of this consultation is to find a solution that achieves separation of the BSPS from [Tata Steel UK], subject to its funding position being strong enough to exist outside the [Pension Protection Fund] and finding a new employer willing to sponsor the scheme, whilst also achieving the best outcome for BSPS members.” 

The move would allow the government to base the scheme’s annual pension increases on the consumer price index inflation measure, which is usually below the retail price index measure currently used by the BSPS.

The government changed statutory pension increases in the public and private sectors from RPI to CPI in 2011 for future accruals, while the BSPS proposal would affect all accruals.

A move to CPI would reduce the BSPS liabilities by around £2.5bn, while it would cost £7.5bn to buy out the scheme’s benefits according to the government.

Existence outside PPF

Allan Johnston, chair of the trustee board, said his concern was to deliver his pensions promise to the scheme's 130,000 members and keep them out of the PPF.

“Sixty thousand of those members would see a serious reduction in their prospective pension, whereas the proposal I’m keen to follow through would mean there is no reduction at all to current pensions in payment and accruals that people have made who are still working.” 

Johnston added that the proposal is “significantly better” for 60,000 members, and “marginally better or at least no worse” for the rest.

According to the 40-page consultation document, the proposals would not benefit all members. If the scheme was to stay out of the PPF, 5,800 pensioners in the BSPS would see their pension payments reduced by £5,408 a year once they reach state pension age.

Asked whether he thought that an indexation switch alone would help the scheme enough to make the business attractive to buyers, Johnston said: “Definitely. That’s the only thing we’re proposing and no other changes to the scheme benefits. In fact in the consultation document it states specifically that’s the only thing we’ll be doing.”

However, others disagree. Richard Farr, managing director of Lincoln Pensions, said the £2bn-plus savings would not be enough for the deficit on the scheme and would not make the business more attractive to a buyer: “I find the deficit so large you won’t find any buyer for it.”

Wider implications

The consultation, which runs until June 23, could involve legislative changes that could set a precedent for other pension funds. 

While advising against the conversion unless it actually made the business more attractive, Farr supported the precedent that would be set for other companies and schemes by doing so.

“There are thousands of schemes out there that need help. The precedent being set will help them more than Tata. Break the doors open and it will be required elsewhere where it’s needed.” 

However, echoing concerns from other MPs speaking in parliament following Javid’s statement, Angela Eagle, Labour’s shadow business secretary and former pensions minister, warned that moving from RPI to CPI “risks creating a very dangerous precedent” and was currently illegal.

Malcolm McLean, senior consultant, Barnett Waddingham, questioned whether the government could introduce legislation for a single scheme.

He said: “The question is whether they can actually do that for one scheme. The implications spread much wider to all the other schemes that have got RPI which affect it. It’s what the implications would be for pensions more widely if we went down this road.”

He said a green light to a sale of the business that would leave out the pension scheme would result in a ‘zombie’ scheme without an employer behind it, while being bought out by the insurance sector would be “incredibly” expensive.

But the consultation document warned that a sponsoring employer would still be required, and that an indexation change would not eliminate future funding risks.

"It is important to recognise the risks associated with this proposal. It presumes the existence of a sponsoring employer who is able to support the scheme in the long term, an investment strategy which will effectively manage risk in the long term, and most significantly it presumes that the scheme’s current funding is sufficient to pay the benefits once the reductions are applied," it reads.

"It is the PPF and the levy payers who will bear the risk for this scheme in the future."