BSPS nears compromise deal as Tata announces closure plan

The £15bn scheme has been at the centre of an intense debate over the past year around giving struggling sponsors the ability to restructure accrued benefits.

The UK arm of the steel conglomerate is also considering other structural changes to its scheme, as trustees announced that entry into the Pension Protection Fund is the most likely outcome.

I could see that as something which might be appealing to the trustees and the members of the scheme

Alan Rubenstein, Pension Protection Fund

The DB scheme will be replaced by a “competitive” DC scheme, which could offer combined contributions of up to 16 per cent.

Potential benefit changes

Tata’s announcement of the agreement on Thursday said that it will not continue to support its UK business unless it can undergo “structural derisking and delinking of the British Steel Pension Scheme fund from the business”.

The group declined to comment on whether that modification would include changes to indexation of benefits, or the transition of the scheme to the PPF via a regulated apportionment arrangement.

In a statement, Koushik Chatterjee, group executive director for Tata’s European business, said: “The proposed changes to future pension provision and other employment terms are necessary to derisk the company and help achieve long-term sustainability.”

He added: “We are also working separately on a necessary structural solution for the British Steel Pension Scheme fund.”

That a small company relative to the size of its pensions liabilities should look to close its scheme is unlikely to come as a surprise to those involved in a private sector defined benefit industry largely populated by closed schemes.

But for former pensions minister Ros Altmann, the language used by Tata belies a perhaps less palatable truth. She said: “It seems very clear that the old scheme’s benefits are going to be reduced.”

Little appetite for legislative change

The BSPS trustees were not involved in the talks, but confirmed that the most likely outcome for the scheme would be entry into the PPF, unless benefits were modified. They said the closure of the scheme was an “important step” towards this.

Altmann ruled out the possibility that changing the rules on inflation linking, as is being considered by current minister Richard Harrington, could help the ailing scheme.

“A statutory override on RPI wouldn’t help British Steel. The legislation they would need would be far more draconian,” she said.

Richard Farr, managing director of covenant specialist Lincoln Pensions, agreed with the government’s decision earlier in the year not to enact a legislative carve-out for Tata.

“They shouldn’t do it as a one-off, but they are already making compromises. Halcrow was a compromise,” he said. He argued that greater flexibility and transparency is needed to ensure the best outcomes for all members.

RAA deal on the horizon?

That compromise would likely involve the granting of a regulated apportionment arrangement by the Pension Protection Fund and the Pensions Regulator, which has previously been used with the Halcrow and Kodak pension schemes, as "there are very few ways of delinking a pension scheme from the employer" according to Anne-Marie Winton, partner at Arc Pensions Law.

While Farr said greater clarity is needed on how distressed the sponsoring employer should be in order for an RAA to be granted, Winton noted that a strict test already exists. “[Insolvency] has to be inevitable within 12 months,” she said. “There has to be a burning platform.”

For its part, the PPF has hinted at its support for a compromise that delivers a better outcome for members than an insolvency event.

Alan Rubenstein, chief executive of the PPF, said: “If what comes out of this is a revised arrangement where Tata continues to stand behind the scheme, albeit closed to future accrual and potentially with existing benefits reduced to above-PPF levels, then I could see that as something which might be appealing to the trustees and the members of the scheme.”

DC scheme negotiations 

If the closure goes ahead after consultation with employees, active members will be transferred into what Tata called a “competitive” defined contribution arrangement.

Although Tata has not confirmed details about this scheme, maximum combined contribution rates could reportedly be as high as 16 per cent, with 10 per cent paid by the employer – the level currently provided by the DC section of the BSPS.

That level is significantly above the average for private sector occupational schemes, which stands at 4 per cent of pensionable earnings according to the Office for National Statistics.

Martin Hunter, consultant actuary at Punter Southall Transaction Services, pointed out that the presence of unions in discussions may help members to get the best deal, but also stressed the importance of a simple communication strategy during negotiations.

“It’s really about the quality of the consultation,” he said. “There are tools you can put together and make available to people as well as offering face-to-face help.”