“The importance with these deals is that the Sponsoring Employer - Tata Steel in this case - has to prove to the Pensions Regulator and the Pension Protection Fund (PPF) that if no deal is done then by having to continue supporting the pension scheme it will drive them insolvent.
“When a deal like this is made, the pension scheme generally enters the Pension Protection Fund (PPF) and the sponsoring employer makes a one off contribution to the pension scheme and the PPF get a stake in the sponsoring employer. The latter is an anti-embarrassment clause in case the sponsoring employer's fortunes do drastically take an upturn.
“The end result is that pension scheme members get PPF compensation, which equates to a 10% immediate reduction for those below the pension scheme's normal retirement age and lower increases for all in the future. This is what they would have received had no deal been done and the sponsoring employer had become insolvent. The positives are that the sponsoring employer remains as a going concern, thus safeguarding jobs and the PPF gets more assets than it would have had such as extra contribution and stake in the sponsoring employer.
“The Tata Steel deal is slightly different to this, however, as a new scheme is being set up that will provide better benefits than the PPF, but worse than the old arrangement (British Steel Pension Scheme). The new scheme is to receive a contribution of £550m from Tata Steel and a third stake in Tata UK, but strangely Tata Steel will support the new scheme.
“I wasn't personally involved with the case but have been following it very closely, and call me a cynic, but I do wonder if the UK government put pressure on the Pensions Regulator and the PPF to do a deal with Tata as they did not want to lose the UK's capability to produce steel. It may also be feasible that Tata could have actually continued to support the old scheme for the foreseeable future.
“Whatever the reasons behind it, the deal seems to have a broadly happy ending compared to the doomsday scenario that could have occurred and I’ve no doubt we will see more of these deals in the future.”
Background
Last year Tata Steel, which is the sponsoring employer of the BSPS, made it clear that in order for operations in Port Talbot to continue, it had to remove its responsibilities for the BSPS and its £15bn or so of pension liabilities. Although the scheme is relatively well funded when compared to other defined benefit schemes in the UK, its size and relative risk to Tata Steel was the problem.
In order to distance itself from the scheme, it would first need to close the BSPS to future benefits and replace these with a defined contribution arrangement for the 13,000 or so remaining steel workers employed in the UK.
Once that was completed, the next step would be for Tata Steel to detach themselves from the £15bn BSPS pension liabilities, with these being taken on by either the Pension Protection Fund or a new replacement scheme that would not have the backing of a sponsoring employer. The consequence of the second step is that the benefits built up by many of the BSPS members could be reduced initially by as much as 10% and benefits would receive lower annual increases in the future.
The first step was put to the vote and accepted by the current steelworkers in February and the BSPS closed to future benefits from 31 March, with a defined contribution arrangement put in its place. That was the relatively easy step.
After months of negotiations between Tata Steel, the BSPS, the Pensions Regulator and the Pension Protection Fund, things have now made an agreement and an announcement looks set to be made this week.
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