In a time before talk of the referendum became all consuming, it was widely reported that the Government was considering how to support the UK steel industry.  Those considerations are ongoing and as part of them, the Government issued a consultation document on 26 May setting out options for helping the British Steel Pension Scheme (BSPS); the consultation period closed on 23 June.

What did the consultation document suggest?

The Government has expressed its desire to provide a package of support for the British steel industry to enable it to have a sustainable future.  In the consultation document, it explains that Tata Steel Limited is looking to sell its subsidiary, Tata Steel UK (TSUK), which is the principal employer of the BSPS, one of the largest defined benefit schemes in the UK with 130,000 members.  It is reported to be very unlikely that a buyer for the company will be found who is willing to take on the BSPS, with its sizeable funding deficit, and so the BSPS needs to be separated from TSUK.

The consultation document sets out a number of options which are or could be made available to the trustee of the BSPS, some of which would require changes to existing pensions legislation.  The trustee and the Pension Protection Fund (PPF) have provided their responses to the consultation.  In looking at their responses, we consider whether it is possible to protect the benefits of BSPS members while not rewriting public policy.

What are the options for dealing with the BSPS?

Option 1 would involve the BSPS being separated from TSUK, using existing regulatory mechanisms, and entering a PPF assessment period.

Option 2  would see TSUK ceasing to participate in the BSPS and paying its Section 75 debt.  Tata Steel Limited has already indicated that such a payment would be unaffordable and this option is not under serious consideration.

Option 3  would require new legislation to be enacted, enabling the trustee to pay lower levels of increase to pensions in payment and deferred pensions.  The trustee strongly believes that the significant reduction in liabilities which would result from pursuing this option would enable the BSPS to continue outside the PPF.  The trustee believes that this option would provide the same or better than PPF level benefits for the majority of its members.  This option would also involve putting a new sponsoring employer in place.

Option 4  would also require the enactment of new legislation, to enable a bulk transfer of BSPS members (without their consent) to a new scheme offering reduced increases, as in option 3.  Members would be given the right to opt out of the transfer.

There are nuances within the options and the consultation responses which we have not included in this brief blog post.  Instead we are focussing on the trustee’s position and some of the concerns raised by the PPF.  The perspectives of the trustee and the PPF are very different and ultimately it may be external, political considerations which dictate the decision on which option should be followed.

The trustee’s position

The trustee notes in its response that the BSPS, while it remains outside the PPF, is able to provide benefits to its members which, in the majority of cases, are in excess of PPF compensation.  It also claims that the PPF and levy paying schemes would be better off if the BSPS were not to transfer to the PPF.  One of the reasons for this is that the BSPS contains a bridging pension provision, whereby members who take early retirement can elect to receive a higher initial pension until State pension age, with a lower pension thereafter.  Were the BSPS to transfer to the PPF imminently, members who had made this election and who had not passed State pension age would be awarded PPF compensation based on the higher level of pension, with no reduction being made at State pension age.  The cost of this to the PPF (and ultimately to the levy payers) is estimated by the trustee to be around £500 million.

The trustee states that the PPF would be better off if the BSPS were to stay outside the PPF for at least ten years because in the coming years, more members who have retired early on a higher pension will pass state pension age and their benefits will be reduced, meaning a reduction in the level of compensation which would be payable if the BSPS were to transfer to the PPF.  The trustee does not address the possibility that more members will elect to take early retirement and so the impact of the bridging pension will remain.  However we do not know whether the election to take early retirement is dependent on employer consent, and it is possible that additional amendments to the BSPS could be made to prevent further members taking early retirement on this basis.

The trustee strongly prefers option 3: continuing to run the BSPS outside the PPF, following a flexible apportionment agreement or a regulated apportionment agreement, with a reduction in the level of increases applied to pensions in payment and deferred pensions[1].  The trustee explains in its response that when the BSPS was established, its rules permitted such reductions to be made if they were not affordable, but the effect of Section 67 of the Pensions Act 1995 now prevents them being made.  It asks the Government to make regulations disapplying Section 67 to enable the reductions to be made.

Looking at option 4, to enable a bulk transfer to a new scheme offering lower increases to benefits to take place without consent, new legislation would be required.  The trustee appears open to considering the option but in its view, it would not achieve better outcomes for the BSPS members, the UK steel industry and PPF levy paying schemes, as compared with option 3.  It expresses concerns about the cost of setting up a new scheme, the time such a transfer would take and the effect on the PPF (it assumes that most of those members who had taken early retirement at a higher level would opt out of the transfer, leaving the PPF to meet the £500 million due to the members with bridging pensions).  The trustee notes that legislation would most likely require the trustee to be satisfied that a bulk transfer without member consent in such circumstances was “in the best interests of members” – it is not clear whether any detail on what “members’ best interests” should mean would be set out in new regulations.

The PPF’s position

The PPF does not agree with the trustee that the majority of BSPS members will be better off outside the PPF.  The PPF’s greatest concern appears to be that treating the BSPS as a special case will mean disparity of treatment between PPF levy paying schemes.  It suggests that in the event that options 3 or 4 are chosen, the BSPS should be made ineligible for PPF entry.  We can understand this approach, but it seems that broadly speaking, the trustee is hoping to keep the BSPS running on a self-sufficient basis.  While as a matter of policy it may not be wise to treat schemes differently, should the BSPS members be penalised if, ultimately, the trustee’s considered attempts to keep the scheme afloat should fail (particularly if their benefits have been transferred to a new scheme without their consent)? A further concern of the PPF is that if option 4 were chosen, it is possible that the sponsoring employer of the new scheme would be a shell company with little capital.  In its response, the PPF suggests that the success or failure of the new scheme would depend entirely on the success or failure of the new scheme’s investment strategy.

A matter of policy?

The trustee is working to protect the interests of the BSPS members.  The PPF wants to ensure equality as between levy paying schemes.  The wider public interest is in avoiding the fallout, should the UK steel industry fail.  There is of course a public interest in equality – under the proposals, one employer would see an improvement in its operating position at a time when its competitors and many others are struggling with defined benefit liabilities.  The public interest in equality might not be well served, if legislation is passed which would disapply Section 67 for one scheme.

The issues are too numerous to consider in detail here, but there is a debate to be had around the approach to be taken to changing the law when public policies collide in the way that they have in the British Steel case.  The protection of members’ accrued benefits (the reason Section 67 was enacted), the protection of the benefits of the members of one scheme at higher than PPF levels (the trustee’s argument for preferential treatment by the Government) and the need to treat levy paying schemes and employers in the market on an equal basis do not sit easily together.

This post was edited by Jill Walters. For more information, email blogs@gateleyplc.com.

[1] The increase to deferred benefits would be for future periods of deferment only.

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.