The government has launched a consultation into how Tata Steel can separate from the British Steel Pension Scheme (BSPS) by allowing trustees to cut back members' benefits.
Launched last week, the consultation aims to establish whether the scheme can be stripped back to enable Tata Steel to sell.
Tata Steel UK underwrites the pension scheme and the funding black hole is putting bidders off buying the loss-making business.
The BSPS currently has 130,000 members, assets of £13.5billion, and has a deficit of around £500million.
Finding a buyer prepared to take on the current pension liabilities has already proven to be unlikely, leaving two options on the table for scheme members – entry into the Pension Protection Fund (PPF) or the government's proposals.
The government proposal appears to offer members a better deal, with those under the age of 65 at least 10 per cent better off, and in some cases, more than they would be if the scheme ends up under the PPF.
Clive Fortes, partner at independent pensions consultancy Hymans Robertson, said that faced with the prospect of Tata Steel's insolvency and members falling into the PPF, a deal that allows both Tata Steel to survive and members to remain outside the PPF "looks attractive."
He said: "Companies splitting off their pension schemes is not new and the statutory provisions to allow them to do so in strictly limited circumstances already exists – crucially with the Pension Regulator's and the PPF's approval."
"What is not currently possible under UK legislation is for the British Steel Pension Scheme trustees to cut back members' benefits without each one of the 130,000 members agreeing – and that is the substantive change on which the government is consulting."
If the proposals for Tata Steel go ahead, concerns have been voiced about the implications for other under-funded schemes attempting similar deals.
Steve Webb, former pensions minister and now policy director for mutual life group Royal London, told the Telegraph: "It does set a precedent and rushed legislation always has a danger of a loophole."
He added that three-quarters of UK schemes are in deficit – the pension plans of some 4,000 companies – and that it was likely legal battles could follow as they tried to copy the change.
The Pensions and Lifetime Savings Association (PLSA) said it recognised the government had a crucial role to play in the future of Tata Steel, but urged ministers to be alert to the fact their actions could affect millions of savers.
PLSA chief executive Joanne Segars said: "Trustees play a crucial role in safeguarding the interests of scheme members and that protocol must be maintained in any reform."
