Tim Middleton discusses some of the options that the Government could consider to overcome the British Steel pensions crisis
In May, the Department for Work and Pensions (DWP) issued a consultation paper which considers drastic options for addressing the deficit in the British Steel Pension Scheme (BSPS).
There have been many past examples of political crises arising from corporate failure and underfunded schemes; the BSPS case has for example followed hot on the heels of the insolvency of BHS. It is important therefore to consider the factors that have made this case so exceptional and the reasons that have prompted the Government to consider unprecedented solutions.
The future of steel production in the UK is currently in jeopardy. Tata Steel UK, part of the Mumbai-based conglomerate which took over the vestigial business of the British Steel Corporation, is no longer prepared to tolerate losses reported to be £1 million per day and has proposed to close its UK operation completely unless a buyer for the business can be found.
However, the loss of the UK's steel industry would be politically damaging to the Government. It would also see the BSPS – with 130,000 members and £14 billion in liabilities – fall into the Pension Protection Fund (PPF).
To avoid this, it is imperative that a buyer for the business be found. However, this is an unlikely prospect unless a potential saviour is not required to plug the £485 million deficit in the BSPS. Confronted by political crisis, the Government is prepared to think the unthinkable.
Firstly, we should note that at a cost of approximately £7.5 billion, wind-up and buy-out is not an option.
A Regulated Apportionment Agreement (RAA) would allow existing regulations to effect a separation of the business from the scheme and result in the reduction of benefits to a fully funded level. This would be better for members than the benefit limitations that would apply were the scheme to fall into the PPF.
More radical – and controversial – is the proposal that legislation be introduced to allow Section 67 of the Pensions Act 1995 to be disapplied. This would see accrued benefits revalued and indexed in line with the Consumer Prices Index (CPI) rather than the (higher) Retail Prices Index (RPI), and has put Sajid Javid's cat amongst pensions industry pigeons.
On the one hand, this would result in a reduction of BSPS's liabilities by about £2.5 billion and would allow continued UK steel production to remain viable. On the other hand, allowing employers to reduce accrued rights would, some argue, set a striking and ominous precedent.
Steve Webb, not one normally given to hyperbole, has warned darkly of 'contagion' and it is easy to imagine what oak trees might grow from this particular acorn.
Nobody should make light of the efforts being made to save the UK's steel industry. But we should think long and hard before opening Pandora's box.
Written by Tim Middleton, Technical Consultant at the Pensions Management Institute
