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Responses to the Government consultation on restructuring the British Steel Pension Scheme

July 2016

The British Steel scheme trustees and PPF have responded to the Government consultation regarding the restructuring of the British Steel Pension Scheme.
Overview

On 26 May 2016 the Department for Work and Pensions (“DWP”) published a consultation paper about the options for restructuring the British Steel Pension Scheme (“Scheme”).

The consultation period ended on 23 June 2016 and the results are currently being analysed.

For further information regarding the Scheme and the contents of the consultation paper, see our previous summary.
Trustees’ Opinion

The Trustees strongly support the proposal to disapply the restrictions contained in section 67 of the Pensions Act 1995; this was the third of the four options proposed by the government in their consultation paper.

By disapplying section 67, the Trustees would be permitted to make a detrimental modification without member consent, and in particular they could change the basis pensions in payment are indexed and deferred pensions are revalued for future periods, using CPI instead of RPI.

The Trustees believe this would enable the Scheme to be financially self-sufficient and would ultimately keep the Scheme out of the PPF indefinitely. The Scheme is about two-thirds the size of the PPF (based on the PPF’s latest accounts) and although the Scheme would not be able to buy annuities equivalent to the PPF, they do have sufficient assets to provide better benefits than the PPF if it was to continue operating on a stand-alone basis.

The Trustees would also ensure that any surplus funds generated would be used to either reinstate pension increases or to improve the security of benefits, which would not happen if the Scheme went into the PPF.

They forecast that the members would either receive the same or better benefits via this route than they would if the Scheme was to enter the PPF so it would be in the best interests of the members and PPF levy payers.

In the alternative, if the Scheme was to enter the PPF, the Trustees say this would involve benefit reductions of at least 10% for 58,000 below 65 members and for all members, reductions in their future pension increases.
PPF’s Opinion

The PPF believe the proposals which would see the reduction in benefit levels, in their current format, present “significant risks for relatively limited gains”.

In contrast to the Trustee’s assessment, the PPF believing the “majority of members would receive roughly the same as they would in the PPF and a minority would be worse off. The numbers that are worse off could grow depending on the early retirement and lump sum commutation factors the scheme intends to use”.

In addition to being potentially detrimental to the members, the PPF also highlight that if the Scheme is allowed to continue with reduced benefits, short of a suitable sponsor of the scheme being found which appears unlikely, any future risk would be underwritten by PPF levy payers; the longer the Scheme continues outside of the PPF, the more members who will reach retirement age and therefore the greater amount of PPF compensation will be due.

As a result, the PPF suggest if either of these proposals is implemented then either of the following limitations should be considered:

    the Scheme should be made ineligible for future PPF protection; or
    appropriate restrictions to protect PPF levy payers should be considered such as:

    controls over investment strategies;
    triggers for PPF entry to prevent a significant deficit accumulating;
    transferring pensioner members to the PPF, leaving a much smaller residual scheme continuing outside the PPF;
    provisions which allow the PPF to recover the costs incurred which would not have been incurred had the Scheme entered the PPF.

Ultimately, rather than the third or fourth proposal, the PPF favours the government’s first proposal, namely using the existing regulatory mechanisms with the Scheme entering a PPF assessment period; this is exactly the kind of situation the PPF is intended to assist with, it is tried and tested and importantly balances the protection to members with the impact on levy payers. Although the scale of the Scheme is significant, “a claim on the PPF would be manageable without – in itself- triggering an increase in the PPF levy”.

For more information, please do not hestitate to contact Symon.

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