With news that a deal in principle has been agreed between Tata Steel UK (TSUK) and the British Steel Pension Scheme (BSPS), Stuart Price, Partner and Actuary at Quantum Advisory in Cardiff, explains how the deal compares to what was expected and what it means for the 130,000 members of the BSPS.
Last year Tata Steel, which is the sponsoring employer of the BSPS, made it clear that in order for operations in Port Talbot to continue, it had to remove its responsibilities for the BSPS and its £15bn or so of pension liabilities. Although the scheme is relatively well funded when compared to other defined benefit schemes in the UK, its size and relative risk to Tata Steel was the problem.
In order to distance itself from the scheme, it would first need to close the BSPS to future benefits and replace these with a defined contribution arrangement for the 13,000 or so remaining steel workers employed in the UK.
Once that was completed, the next step would be for Tata Steel to detach themselves from the £15bn BSPS pension liabilities, with these being taken on by either the Pension Protection Fund or a new replacement scheme that would not have the backing of a sponsoring employer. The consequence of the second step is that the benefits built up by many of the BSPS members could be reduced initially by as much as 10% and benefits would receive lower annual increases in the future.
The first step was put to the vote and accepted by the current steelworkers in February and the BSPS closed to future benefits from 31 March, with a defined contribution arrangement put in its place. That was the relatively easy step.
After months of negotiations between Tata Steel, the BSPS, the Pensions Regulator and the Pension Protection Fund, things appear to be moving in relation to the next stage, and, as we understand it, an agreement is imminent.
However, there is twist that I don’t think any of us in the pension industry expected to happen.
Under the proposed deal, which still needs to be formally signed off by all parties, Tata Steel is willing to pay £550m into the BSPS as well as provide it with a 33% stake in TSUK. A new scheme would then be set up to replace the BSPS. While this new scheme will have lower future annual increases than the BSPS, it will offer better benefits than the Pension Protection Fund.
The 130,000 members of the BSPS, consisting of current and past steelworkers, will have an option to transfer their BSPS pension into this new scheme. While it is voluntary and there’s no obligation for them to transfer, ultimately if they don’t, they will receive the lower Pension Protection Fund benefits.
The twist is that TSUK will support the new scheme, which has a much lower risk to TSUK than the BSPS due to the reduction in benefits. This is a much better solution than with no sponsoring employer as we thought was going to happen. Support from the TSUK will provide members of this new scheme with more security and overall many members will get a better outcome than we were anticipating.
Although discussions are still ongoing and the finer details need to be firmed up, in my opinion, on the surface this is a far better deal than we were expecting and much better than what happened to BHS pension scheme members.
Established in 2000, Quantum Advisory provides pension and employee benefits services to employers, scheme trustees and members from offices in Cardiff, Bristol, Amersham, Birmingham and London.