As expected, the Government yesterday launched a consultation which seeks views on various proposals regarding the British Steel Pension Scheme (BSPS), as part of the attempts to secure the future of Tata Steel. The consultation is seeking views on four proposals but stresses that the Government has not yet taken any decisions on how to proceed.

Two of the proposals would require secondary legislation and therefore the Government is required to consult on them before they could be implemented. This consultation is taking place even though a buyer for Tata Steel has not yet been confirmed because the Government is keen to be in a position to act quickly as and when that becomes necessary.

The options

The four options for dealing with the BSPS outlined in the consultation paper are:

  • use a regulated apportionment arrangement to separate the BSPS from Tata Steel UK
  • trigger the section 75 debt due to the scheme (although it is recognised that most of this would not be recoverable)
  • enable the trustees to reduce future pension increases and revaluation under the BSPS to statutory minimum levels (this would involve the Government passing legislation to exempt the BSPS from the restrictions under section 67 Pensions Act 1995 which would otherwise prevent the trustees from reducing members’ benefits without their consent, in order to enable the trustees to make these specific changes)
  • enable the trustees to transfer members’ benefits to a new scheme which provides only for pension increases and revaluation at statutory minimum levels, without obtaining members’ consent to the transfer (this would involve the Government passing legislation to enable a transfer without members’ consent in these circumstances).

Options 1 and 2 could be implemented under the existing regulatory framework, whereas options 3 and 4 would require changes to existing legislation before they could go ahead.

Significantly, the consultation paper proposes that the legislative changes required for option 3 would only apply to the BSPS. However, it proposes that the ability under option 4 to transfer members without their consent to a new scheme which pays reduced pension increases and revaluation could be made available to other very large schemes (with over 100,000 members), subject to certain conditions being met (including the need for the trustees to reasonably believe that the scheme will enter a PPF assessment period within 12 months).

RPI/CPI

The proposed changes to revaluation and pension increases under the BSPS to reflect the statutory minimum requirements would, amongst other things, result in a switch from RPI to CPI for revaluing deferred benefits under the BSPS. The consultation paper does not go into detail on this and it is not clear whether the proposals would also mean a switch from RPI to CPI for pension increases or whether CPI is already used for this purpose under the BSPS.

In any event, the options that are being proposed would not have any direct application to the question of whether other schemes can switch from RPI to CPI as the basis for calculating pension increases and revaluation in the normal course of events.

Wider implications

The fact that the Government is intervening and contemplating providing greater flexibility to allow for the restructuring of defined benefit pension promises in this case (albeit in fairly extreme circumstances) shows that, in particular circumstances, the Government may be prepared to take action to facilitate the restructuring of a business and its defined benefit scheme. The difficulties of dealing with pension schemes in circumstances of near-employer insolvency have been highlighted recently by the Pollock decision and BHS.

Of wider relevance for other very large schemes in deficit with a sponsor on the brink of insolvency is the proposal to extend the ability for trustees to transfer members without their consent into a new scheme which pays reduced benefits. This would, however, be subject to conditions that would only apply in fairly extreme scenarios.

The consultation paper is not clear as to why the Government is contemplating allowing option 4 (transfer to a new scheme) to cover other very large DB schemes, but is not willing to do the same in relation to option 3 (reduction of benefits within the existing scheme). The only substantive difference based on the proposals is that members would be able to opt out of the former but not the latter.

The paper emphasises that the reason for limiting the extension to very large schemes is that it is more difficult for those schemes to obtain the individual consent of a significant proportion of members. While there is logic to this, it is likely that there may be calls for smaller schemes to be given the same level of flexibility in similar circumstances.