tPR greenlights British Steel RAA

Terms for the regulated apportionment arrangement had been agreed in principle between the scheme and sponsor Tata Steel UK in May.

The normal PPF route’s quite a blunt instrument, and what we should really be trying to do is make the system a bit more flexible

Kerrin Rosenberg, Cardano

The deal is expected to take effect on or around September 11, and will mark the end of a protracted struggle over the scheme’s future that included consideration of changes to the law.

The revised benefit structure would shift the basis used to calculate future pension increases from the retail price index to the consumer price index, rather than capping and cutting accrued benefits under the PPF rules.

In return, Tata Steel will pay £550m into the BSPS and give the scheme a 33 per cent equity stake in TSUK.

The future of the BSPS

The new scheme created to provide these benefits will continue to be sponsored by TSUK, leaving it responsible for any future deficit. The old scheme will be taken on by the PPF.

All the assets of the BSPS, including those pledged by Tata in the RAA deal, will be split between the new scheme and the PPF in proportion to the choices taken by members.

A spokesperson for the regulator said: “As part of the qualifying criteria for the proposed new scheme, the trustee and the employer have agreed an initial funding threshold, with which TPR is satisfied, and a low risk investment strategy."

"If and when the new scheme is established, we will apply our normal regulatory approach to it. The new scheme would also be eligible for PPF protection,” they added.

It is unclear whether Tata’s contributions to the scheme would leave the new scheme fully funded on a buyout basis. In December 2015 the current BSPS had a s179 deficit of £1.5bn and a buyout deficit of around £7.5bn.

Richard Farr, managing director at Lincoln Pensions, said some risk could still be being shared out between the new scheme and the PPF.

“What’s the real risk that scheme two is running? The obvious reference is the buyout deficit and we don’t know what that is yet,” he said.

Experts pleased with deal

Former pensions minister and Royal London director of policy Steve Webb said the outcome was positive when compared with the alternatives, which had included proposals for a legislative carve-out allowing the BSPS to modify benefits.

“Any pension law written quickly for one scheme just has to be a bad thing,” he said, adding that the law might have set legal precedent for other schemes to follow.

Baker McKenzie partner Chantal Thompson agreed: “The country wasn’t ready for biting the bullet on allowing schemes to reduce indexation and revaluation and I think it will still be a big challenge to define a business in a distressed scenario.”

If the RAA gains approval, it will be the second that the regulator will have agreed this year, and the third in the past two years, following agreements over the Halcrow and Hoover pension schemes.

The Work and Pensions Committee has previously proposed relaxing the requirement for insolvency to be inevitable within 12 months for an RAA to be approved.

Charles Cameron, partner at Slaughter and May, the law firm that advised Tata Steel on the restructuring of the £13bn BSPS, noted that “the RAA mechanism is actually one that works… provided you can meet the principles”, but highlighted that “the regulator’s keen not to make them an easy way out”.

Cameron suspects that the rate of RAAs being agreed will stay the same, but said they may feature the creation of a new scheme more regularly.

Calls for more flexibility 

Kerrin Rosenberg, chief executive of investment and risk specialist Cardano, said that while RAAs are rare, they seem to apply to the larger funds, “where you can justify the advisory fees [and] you can justify the time being spent”. The small schemes with smaller budgets, however, “get shovelled into the PPF”, even though it is quite common to be able to find a better solution to the PPF route.

"The normal PPF route’s quite a blunt instrument, and what we should really be trying to do is make the system a bit more flexible, and allow a more transparent set of options that can be explored,” he stressed.

The Department for Work and Pensions' green paper, published in February, discussed appropriate methodologies for defining what a stressed sponsor might be with regard to RAAs.

Rosenberg thinks that the requirement for insolvency to be inevitable within 12 months is too strict, noting that a sponsor may limp on for another few years, despite almost certainly not being able to pay benefits in full.

“All we have at the moment is a system that says, go away, keep paying full benefits, keep negotiating with your trustees… and come back when you’re terminally ill,” he said.

Martin Hunter, principal at consultancy Punter Southall, said: "Unless there are changes made, [RAAs] will continue to be only used in very extreme circumstances."

He said that if the rules were relaxed, there would be concerns around “what protections you do have in place so that employers cannot change the benefits willy-nilly”.