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Government Consultation Published on Options for Restructuring the British Steel Pension Scheme

July 2016

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 (“BSPS”).

The consultation was launched in anticipation of the sale of Tata Steel UK (“TSUK”) as two of the four proposed options would require secondary legislation and there is a statutory requirement to consult on such legislation.

The consultation period is due to end the 23rd June 2016.
Scheme Background

TSUK is a subsidiary of Tata Steel Limited (“Tata”) and has numerous plants across the UK, employing approximately 11,500 people.

Due to significant losses Tata says it has been forced to sell its UK subsidiary as it could no longer sustain such losses (ÂŁ2 billion over five years).

TSUK is the principal employer of the BSPS which has approximately 130,000 members (including 14,000 active, 32,000 deferred and 84,000 pensioner members).

Based on figures from December 2015, the BSPS has a deficit estimated at ÂŁ700 million on a technical provisions basis, ÂŁ1.5 billion on a section 179 basis and to buy the deficit out in full is estimated at ÂŁ7.5 billion.
Why is the consultation needed?

Due to the scheme’s exceptional level of deficit and underfunding it is unlikely to be able to secure annuities which would provide the members’ full benefits and without a sponsoring employer it is likely it would enter the Pension Protection Fund (“PPF”) and members would only receive PPF compensation.

As any prospective purchaser of TSUK is unlikely to take on a scheme with such a deficit, in order to both obtain the best outcome for BSPS members and to preserve as many jobs as possible by encouraging the sale of TSUK, the Government has taken the unusual step of intervening and is proposing several options going forward.
What is the Government proposing?
Option 1: Regulated Apportionment Arrangement

A Regulated Apportionment Arrangement could allow TSUK to transfer the BSPS to a new employer; the scheme liabilities would transfer to the new employer and TSUK would be released.
In order for this option to be used there are several conditions which must be met and the Pensions Regulator and the PPF must agree to it.

In this instance, if the BSPS is funded below PPF levels and the new employer cannot support the scheme, then following an insolvency event, the BSPS would enter the PPF.

Alternatively, if the BSPS is funded above PPF levels, then: benefits could be bought out; members could opt to move to a scheme with reduced benefits but benefits higher than PPF levels; or the scheme could enter the PPF.
Option 2: Triggering the s75 Debt

TSUK could choose to trigger the s75 employer debt which is the amount required to secure the existing employer’s liabilities to the scheme on the insurance market.

It is possible for the Pensions Regulator, the PFF and the employer to negotiate a buy-out which would secure member benefits above PPF compensation but below the full value of the member benefits.

However, Tata have indicated that TSUK would not be able to afford such a payment.
Option 3: Reducing Future Pension Increases and Revaluation to Statutory Minimum

Although the BSPS trustees believe they could not afford to pay full member benefits, they do believe they could afford to pay members at the same or above PPF levels.

Tata and the trustees have therefore asked for legislation which would allow them to amend the scheme rules in order to reduce the levels of indexation and revaluation payable on future payments of accrued pension rights; both would be reduced to the minimum level required by law e.g. calculated on a CPI instead of an RPI basis.

This would reduce the level of future inflation increases payable on all BSPS pensions in payment and deferment to either a similar or slightly improved level to that paid by the PPF.

As this would reduce pensions payable to members, the trustees believe it would improve the BSPS’s funding such that it would not be in deficit on an on-going basis and could therefore continue with a sponsoring employer outside of the PPF.

The risk involved is that it is possible the scheme would fall into deficit in the future and would still ultimately be covered by the PPF.

The DWP has concluded that using the power under section 68 of the Pensions Act 1995 to reduce member benefits would be unlawful. Instead the Government could make regulations to disapply section 67 for the scheme, thereby allowing detrimental modifications without the need for member consent or meeting actuarial equivalence.

Given the risks involved in this strategy the proposal would be that: this only applies to the BSPS scheme; it would only permit the changes discussed; there would be safeguards to prevent further changes to accrued rights; and the trustees would be required to unanimously agree the proposed changes are in the member’s interests.
Option 4: Transferring Members to a New Scheme with Statutory Minimum Increases and Revaluation

This option would see a bulk transfer of the member’s benefits to a new scheme which would pay lower levels of indexation and revaluation than the BSPS but better benefits than those available in the PPF.

Given the size of the scheme and the obvious difficulties of obtaining individual member consents, the DWP proposes that a regulatory change is made to allow the bulk transfers without obtaining individual member consent. Unlike option 3, it is proposed that this option would be available to other large schemes in similar circumstances and with similar impracticalities in obtaining individual member consent.

The Government is suggesting several safeguards including that this would only be permitted if: the trustees consider it is in the member’s best interests; members have been notified and have not objected within a prescribed time; and the trustees reasonably believe the scheme will enter the PPF assessment period within 12 months.

Amendments would also need to be considered to potentially allow formerly contracted-out schemes to transfer liabilities to a scheme which has never been contracted. This is currently not permitted and since the end of contracting-out in April it is no longer possible to create such a new scheme for members to transfer into.

For more information, please do not hesitate to contact Symon Rowley.

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