Key points:
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On the whole British Steel Pension Scheme members will be better off under the Government’s proposals than if they entered the PPF
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Scheme members under age 65 will be saved from a 10% haircut to their pensions
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Those over 65 will typically get better spouses’ benefits than in the PPF, worth around 5%
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But this has to be balanced carefully against the risk for the PPF and UK companies paying the levy should the scheme fall into it further down the line
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The Scheme is looking to move from RPI to the ‘Statutory Minimum’ for pension increases - which is less than CPI, improving the chances of the Scheme’s self-sufficient survival
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However, care should be taken to ensure any ‘pressure release’ by way of pension increase change doesn’t open the floodgates for others in less distressed circumstances to shirk their commitments
The consultation launched by the Government yesterday, is looking at ways to allow Tata Steel to separate itself from the British Steel Pension Scheme (BSPS) to allow the trustees to cut back members benefits to give it a chance of surviving outside of the Pension Protection Fund (PPF), says Hymans Robertson, the leading pensions and benefits consultancy.
Commenting on the impact on members, Calum Cooper, Partner, said: “The Government and the British Steel Pension Scheme have looked at ways to secure a better deal for scheme members than would be the case if they fell into pensions lifeboat, the Pension Protection Fund (PPF). On average when someone falls in to the PPF they lose around £45,000* of value from their pension.
“On the face of it the proposals look to be in the best interests of scheme members. Finding a buyer prepared to take on the current pension liabilities has already proven to be highly unlikely. There are therefore two options on the table – the Government’s proposals or entry into the PPF.
“The Government’s proposal will see those under the age of 65 at least 10% better off – in some cases more - than they would be if they were caught by the PPF.
“Those aged 65 or older are entitled to a spouse’s pension based on the value of their pension before taking any tax free cash.
The PPF, on the other hand, will secure the pension as valued at that point in time - essentially after cash has been taken. Under the Government’s proposals scheme members could therefore be entitled to a spouse pension one-third higher than they would have received in the PPF. That could be worth around 5% of the value of the overall pension.
“The only group of scheme members that might do better in the PPF are those categories with lower spouse’s pensions and those with temporary pensions in payment up to state pension age. The latter group are an anomaly - they could get this temporary pension for life in the PPF, which could easily be worth more than the PPF haircut of 10% and the loss of spouse’s pension from taking tax free cash.
“That said, no doubt regulations will be passed in time to address this regulatory wrinkle – and if not, the PPF might actually benefit by delaying any potential entry of the scheme in to the PPF until the temporary pensions have ceased to be paid. That is, the PPF burden could actually become more affordable in time.”
Discussing the potential impact on the PPF and other companies that pay the levy towards it, Clive Fortes, Partner at Hymans Robertson, added: “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 (tPR’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. That is the substantive change on which the Government is consulting.
“Should this be made possible, the trustees will look to reduce members benefits so that it can remain outside the PPF, but to a level that is better than the benefits that would be payable under the PPF.
“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.
“However, the story does not end there. The British Steel Pension Scheme will still need a sponsoring employer – even if this is simply a shell company that has no ability to make further contributions to the scheme. And if things don’t work out as planned, the British Steel Pension Scheme could still end up in the PPF – potentially with a bigger deficit which other PPF levy payers will need to fund. Whether it does or not depends on a number of factors, such as the performance of the underlying assets and demographics.
“This is a key issue – if members are to get better benefits than they would get in the PPF, someone will have to ultimately underwrite these benefits if Tata Steel is to be released from its obligations to the Scheme. Will that be the Government, the new owner of Tata Steel or other UK pension schemes and their sponsors?”
Concluding, Calum Cooper said: “Care needs to be taken to ensure these measures don’t open the floodgates for others who can afford pension increases to shirk their commitments. But the BSPS’s circumstances are relatively unique. They have a rule that, prior to new statutory provisions in 1995, enabled the trustee and sponsor to agree to reduce pension increases where affordability is under strain.
“Given the scheme is relatively unique, if the Government does this in a smart way that sensibly balances the interests of members, Tata Steel and the PPF, then it should be possible to avoid a situation where companies with very different covenant circumstances following suit and slash future pension increases.”
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