The UK’s struggling steel industry once again hit the headlines earlier this year with an announcement by Tata Steel that it planned to sell its UK steel business (TSUK) after reportedly making unsustainable losses of £2bn over five years. In response to this announcement, the Government sought to develop a package of measures to help support the British steel industry including specific options for the British Steel Pension Scheme (the BSPS).
TSUK is the principal sponsoring employer of the BSPS, one of the UK’s largest defined benefit pension arrangements with around 130,000 members, the majority of whom are pensioners. As at December 2015, it is estimated that the BSPS had a deficit of circa £700 million on an ongoing (or technical provisions) basis, £1.5 billion on a Pension Protection Fund (PPF) basis and £7.5 billion on a buy-out (or section 75) basis.
The likelihood of TSUK finding a buyer who was also willing to take on the BSPS appeared remote. With that in mind, the Government ran a consultation exercise during May and June with the aim of finding a solution which would see the separation of TSUK from the BSPS while allowing the BSPS to exist outside of the PPF and also achieving the best outcome for members.
Broadly, the options set out in the consultation are:
Using the existing regulatory framework. This would allow for separation of the BSPS and TSUK but there is a clear risk of the BSPS falling into the PPF with the result that members would receive PPF compensation.
TSUK meeting any pension deficit. TSUK has confirmed that this would not be possible.
Changing legislation to allow for a reduction in the level of benefits paid by the BSPS without obtaining member consent. The proposed change to benefit levels would involve:
- reducing increases to pensions in payment to the minimum levels required by law (that is, CPI capped at 2.5% or 5% and no increases in respect of pre-1997 service); and
- revaluation of early leavers’ benefits to be calculated by reference to CPI rather than RPI.
The Trustee of the BSPS suggests that these reductions in benefits would improve funding such that the BSPS could continue outside of the PPF, providing most (but not all) members with benefits in excess of PPF levels of compensation.
Legislative restrictions (commonly referred to as section 67 restrictions) currently prevent amendments which detrimentally affect accrued benefits without first obtaining the consent of individual members. The Trustee has concerns that the sheer size of the Scheme will make obtaining consent difficult.
The consultation document states that any change to legislative restrictions would only apply to the BSPS and would be subject to a number of preconditions (for example, an independent assessment of scheme funding levels would be required).
Changing legislation to allow for transfer to a scheme providing a lower level of benefits. The proposed change would allow the Trustee of the BSPS to transfer members in bulk, without obtaining consent, to an arrangement providing the lower benefits described at option 3 above.
This would be an alternative means of achieving broadly the same outcome as under option 3, with the key differences being that:
- members would be able to opt out of the bulk transfer; and
- it is suggested that any legislative amendment could capture not only the BSPS but also other schemes in a similar situation.
The BSPS and those of its members who opt out of the transfer will then fall into the PPF. Opting out of the transfer is only likely to be taken by the minority of members who feel that they would be better off with PPF compensation. Again, this legislative change would be subject to preconditions.
The response of the PPF and the Trustee of the BSPS to the proposals have differed on key points. This is unsurprising when considering the interests that both bodies are there to protect.
The PPF considers that options 3 and 4 “pose significant risks for relatively limited gains and raise significant questions of equity between the treatment of BSPS and the PPF’s members and levy payers ”. In its view, proceeding with option 3 or 4 while allowing the BSPS to remain eligible for entry to the PPF in future would result in the PPF underwriting the risk of the BSPS’s investment strategy failing. It was also concerned that allowing the BSPS to step outside the current regulatory framework would set a precedent for the future.
The Trustee of the BSPS notes that the “vast majority of members would receive better benefits than PPF compensation” under options 3 and 4. However, a quirk in the PPF’s current compensation regime would allow members in receipt of a “high/low” pension (a type of bridging pension) at the point of entry into the PPF to obtain windfall benefits as the PPF would not reduce the pension when the member reached state pension age (estimated to cost £500m).
The Trustee did not appear to share the PPF’s view regarding risks relating to the BSPS’s investment strategy or that transferring to the PPF at a later date would result in the PPF taking on a greater liability. Rather, it noted that keeping the BSPS out of the PPF for at least 10 years would result in the scheme’s PPF liability reducing as more members reached state pension age resulting in fewer members being eligible to receive the bridging pension (which would, in turn, lead to fewer members receiving a windfall from the PPF).
Although the sale of TSUK is currently on hold as Tata Steel considers other options, including a potential joint venture with another European steel maker, the issues with the BSPS remain and we await the outcome of the consultation.
While the British steel industry is arguably in a unique position, the same cannot be said in respect of the issues facing the BSPS. Previously, schemes facing impending insolvency of their sponsoring employer have had to operate within the current regulatory regime, with many scheme members ultimately falling into the PPF. Therefore, employers and trustees will want to see whether the approach taken in respect of the BSPS leads the way for more general regulatory change in future.
For example, if option 3 is taken forward by the Government, will it lead to further exceptions being made for other pension schemes such as the BHS pension schemes? If so, will the Government put in place parameters which must be met before it will consider a scheme for this ‘special’ treatment (for example, relating to size, funding levels, wider industry issues associated with the scheme)?
If option 4 is taken forward, greater clarity would be required around the conditions to be imposed on schemes wishing to bulk transfer without consent. Under the current proposals it is suggested that the following conditions should be imposed:
- the trustees notify each member of the scheme and the member does not object;
- the trustees consider that the transfer would be in the member’s best interests; and
- the trustees reasonably believe that the scheme will enter into a PPF assessment period (for example, the sponsoring employer(s) will become insolvent) within 12 months.
For large schemes in particular, the ability to show that all members have received notification will be extremely difficult. Trustees may also feel uncomfortable or unable to carry out an assessment of what is in each individual member’s best interests. We would expect to see a number of additional safeguards around the continuation of schemes outside the PPF before option 4 could be accepted as a viable option.
Whichever option the Government decides to go with, those involved in pension provision will, and should, be taking a keen interest.
Helpfully the Government indicates at the end of the consultation document that it is considering the issue of the transfer of contracted-out benefits (at present, it is not possible to transfer contracted-out benefits from a scheme which was formerly contracted out to a scheme which has never been contracted out). If this problem could be resolved for all schemes, it will provide welcome additional flexibility for employers considering business transactions affecting formerly contracted-out arrangements.