DB IN CRISIS Deal or no deal

Tata steelworkers have voted to accept the pensions offer from the company to safeguard their jobs, reports Stuart Price, Quantum Advisory

In a nutshell: 
  • Tata steelworkers have backed a new pension plan in return for a £1bn commitment from the company to invest in the Port Talbot works and a pledge of no compulsory redundancies
  • the deal is dependent on the BSPS closing to future accrual and being replaced with a DC arrangement; and Tata Steel being able to detach itself from the BSPS and its £15bn of pension liabilities
  • if not, Tata Group has made it clear that it will cease its support and Tata Steel UK will become insolvent, in which case, the current workforce would lose their jobs and the BSPS would enter the PPF.

On 15 February, Tata steelworkers backed a new pension plan, the result of which is the first step of a £1bn commitment to invest in the Port Talbot works and a pledge of no compulsory redundancies.

But what exactly is the deal and what does it say about the changing face of pension schemes across the whole of the UK?

How did this begin?

Tata Steel made it clear in its announcement in December 2016 that the continuation of operations at Port Talbot and further investment in the UK was dependent on:

  • the British Steel Pension Scheme (BSPS) closing to future accrual and being replaced for future pension provision with a defined contribution (DC) arrangement
  • Tata Steel being able to detach itself from the BSPS and its £15bn of pension liabilities.

What will happen to Tata workers’ pensions?

The deal means the closure of the BSPS for future accrual. In relation to the new DC arrangement, Tata Steel will pay a 10% contribution, while members will pay 6%, which is broadly what they are paying now. 

Is it a good offer?

Tata Steel’s contribution of 10% is generous when compared with the UK average; when you remove the very small employers, this is around 6%. However, a 10% contribution from Tata Steel and a 6% member contribution is unlikely to replicate the pension the member would have received had they continued to build up future pension provision in the BSPS.

Can Tata detach itself from its original obligations?

As Tata Steel is not insolvent, it can only detach itself from the BSPS with the approval of the Pensions Regulator and the trustees of the BSPS (and receive no objections from the Pension Protection Fund (PPF)).

Tata Steel in the UK believes that this will happen. If not, the Tata Group has made it clear that it will cease its support and Tata Steel in the UK will become insolvent. In that case, the current workforce would lose their jobs and the BSPS would enter the PPF. 

So, although there is still some way to go, given how far we have come and the ramifications if Tata Steel is not able to detach itself from the BSPS, I expect the Regulator will allow Tata, with some concessions, to detach itself from the BSPS.

How well funded is the BSPS?

Perversely, the BSPS is relatively well funded when compared with other defined benefit (DB) schemes in the UK, but its size (circa £15bn) is the problem. The trustees of the BSPS believe that they have enough assets to secure (in most cases) better benefits than those offered by the PPF, but not as good as those currently provided by the BSPS.  

If the BSPS were to become detached, the trustees are suggesting that they could set up a new scheme to provide these reduced (but better than PPF) benefits, and members would be given a choice whether or not to join the new scheme or go into the PPF.

Will this happen to other schemes in the UK?

Sadly, this type of situation is becoming more and more common. The number of DB schemes in the UK is on the decline and now stands at around 5,800. Of these, 35% are now closed to future accrual like the BSPS. This number has been steadily increasing over the last ten years due to the ever increasing costs to employers of running these arrangements.

Why is this happening?

The main reasons for the rise in costs include people living longer, a low interest rate environment and changes in legislation which have added additional guarantees to DB arrangements.

DC is now commonplace, but to be able to better replicate the benefits provided by DB schemes, contribution rates do have to increase significantly. But that is a battle for another day.

Stuart Price is a partner at Quantum Advisory.

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