Tata Steel has reportedly offered to contribute £520m to the British Steel Pension Scheme as part of a bid to reach a regulated apportionment arrangement with UK pension authorities.
Sources told the Economic Times that the Indian conglomerate is currently agreeing terms with the Pensions Regulator and the Pension Protection Fund over the deal, which would see the nearly £15bn scheme run independently from its sponsor, Tata Steel UK.
Regulated apportionment arrangements have been used to relieve companies of DB liabilities that threaten their financial future in a number of high-profile recent cases. Some industry figures have called for greater flexibility in the rules surrounding the approval of the arrangements.
Having greater flexibility under section 67 wouldn't be taking away members' rights, it's giving them more than they will otherwise get in practice
Faith Dickson, Sackers
The offer comes as Tata Steel’s European operations and German rival ThyssenKrupp eye a merger. The £520m contribution is reportedly intended to release a guarantee that the scheme holds over some of Tata’s Dutch assets.
Experts said that releasing this guarantee would smooth the path to hiving off the pension scheme, and to the merger itself.
The case for an RAA may have been weakened by a recent uptick in the UK steel industry. Employers must be able to demonstrate they will become insolvent within 12 months to be able to shed their pension liabilities.
Agreement not finalised
Tata declined to comment on the reports. Trustees of the BSPS acknowledged that discussions around the future of the scheme were ongoing, but said it was too early to “speculate” on the terms of any final deal.
A spokesperson said: “The trustee remains committed to securing the best possible outcome for members and believes this would be achieved by allowing members to choose between staying in the BSPS (and so getting PPF compensation) and transferring to a new scheme that would provide modified benefits.”
Already promising benefits above the level provided by the PPF, the spokesperson said members’ pension increases lost in the negotiations could also be reinstated if the new scheme’s financial health improved.
Both the regulator and the PPF said they were committed to finding the best solution for the scheme’s members, as well as levy payers and those protected by the PPF.
A spokesperson for the regulator added that “there are still significant issues to be resolved” before the future of the scheme is decided.
More money needed
The amount of money reportedly offered by Tata may be one such issue. Richard Farr, managing director at covenant specialists Lincoln Pensions, noted that when the Department for Work and Pensions consulted on the future of the BSPS in May last year, the scheme’s section 179 deficit stood at £1.5bn.
The section 179 basis calculates the cost of buying out the scheme’s benefits when reduced to PPF equivalent levels.
“The estimated market roll forward to January 2017 would equate to over £2bn,” he said, explaining that further funding from either Tata or ThyssenKrupp may be required before the merger and RAA can go through. “This is actually part of a process, not the end result.”
Should RAAs be more accessible?
The reports seem to confirm an RAA as the most likely outcome for the BSPS, despite other options having been considered. One proposal put before government had suggested a legislative carve-out allowing modification of the scheme’s accrued benefits without member consent.
BSPS nears compromise deal as Tata announces closure plan
Tata Steel UK is to consult with employees on closing the British Steel Pension Scheme to future accrual, as part of an agreement with trade unions aimed at safeguarding the future of its UK steelworks.
“It looks like a real shame for members that Tata appears to be looking at an RAA, which on the face of it will put members into the PPF, rather than the trustees having the flexibility to be able to restructure pension benefits,” said Faith Dickson, partner at Sackers.
With RAAs seemingly increasing in frequency, Dickson urged the regulator to set precedent in the interests of transparency, and politicians to consider extra flexibilities around the timescales involved in RAAs.
Instead of proving inevitable insolvency within 12 months, section 67 could allow preliminary discussions when insolvency is likely in two to three years, giving trustees more time to consider the best outcome.
“Having greater flexibility under section 67 of the Pensions Act 1995 to restructure benefits when employers are otherwise facing insolvency wouldn't be taking away members' rights, it's giving them more than they will otherwise get in practice,” she said.
But others have expressed reservations about such a measure, arguing that the current rules are rightly strict given the gravity of changing a member’s accrued benefits.
Martin Hunter, principal and covenant specialist at Punter Southall, said there are difficulties about how to restructure section 67 while still providing an appropriate level of protection for members. “This can’t be done willy-nilly,” he said.
