The world has woken up to the £486m deficit in the Tata (aka Corus, aka British Steel) Pension deficit and what John Ralfe estimates is a £2bn albatross around Tata’s neck (the predicted cost of walking away with the Government’s consent).
In an interview this morning Business Secretary Sajid Javid told Andrew Marr
This may include bailing Tata out of its pension obligations
If Tata can walk away from the deficit and its long-term funding obligation, then not only will it be financially stronger, but its capacity to build business elsewhere (through cheaper borrowing) will increase.
If Tata can walk away, and if no buyer can be found for its UK businesses, the liabilities for funding fall on the Pension Protection Fund and will be spread across all UK defined benefit plans that pay a levy for the protection the PPF offers.
If Tata walk away, those members of the scheme who have not yet reached retirement may take a “pension haircut” and see the value of their pension promise trimmed. But, and here reports in the Telegraph are wrong, the pain won’t be spread across all 130000 members of the scheme. Those steel men and women who have retired from the scheme will be protected (by what is called priority orders). The bulk of the pain will fall on those who are being made redundant or who are no longer with Tata but have “deferred” rights to a pension.
Could the PPF take the strain?
Not since Royal Mail has so large a pension problem been dumped on the Government’s doorstep. If you remember , the Government’s decision with the much larger Royal Mail pension scheme was to take its assets onto its balance sheet and leave its liabilities off the public accounts. This proved a healthy cash injection for the Chancellor leaving future pain to others.
The estimated £14bn (2015 figure) in the Tata pension scheme could equally be nationalised with similar beneficial effect to the public finances (and with a long-tail adding to our national pension liability). Such is the scale of that liability that the debt might get “lost”, but ultimately it will impact Britain’s capacity to borrow on world capital market for credit rating agencies do not lose sums in excess of £15bn (add to that any liability deficit.
Alternatively, the pain could be transferred to the corporate world that funds defined benefit schemes. The pension levy would go up and this could be seen as a stealth tax on British industry and another reason for companies not to invest in boosting our GDP. Again there are pros and cons.
Were the Government to allow Tata Steel’s pension liabilities to form part of the PPF, then the PPF could almost double in size by (PPF had assets of £17.8bn March 2015). Clearly the Royal Mail was indigestible, but Tata might just be integrated. But it would be a huge project for the PPF and a huge test for the Pensions Regulator. It’s a good thing we have Lesley Titcombe at the helm of tPR, in her I trust.
What are the wider implications
The immediate consideration is the protection of steel worker’s pensions, these could be fully protected (as happened with Royal Mail by Government buy-out) or partially protected by the Pension Protection Fund. But the PPF would secure the rights of those retired and cut the rights of many not retired.
The rules of the PPF mean
People who have retired before the scheme normal pension age (NPA) and who are still below the NPA are treated like deferred members and so can have pensions capped and subject to a 10% cut.
All members will receive PPF indexation rather than what the scheme promises. Which is nil on amounts accrued before April 1997 and CPI capped at 2.5% for later accruals.
Obviously older pensioners likely to have accrued material entitlements pre 1997. Newer members less so.
Of course if inflation remains low, this is less of a “loss” than might have been expected, but the threat of higher inflation remains.
This presents a toxic cocktail of issues for workers already suffering the blow of unemployment and the fear of no imminent re-employment. The social impact of children struggling for work and seeing pension rights cut, while parents enjoy full protection is what the title of this blog refers to.
Bash the old
Protests of intergenerational unfairness along the lines of “we’ve never had it that good” could damage the social cohesion almost as much as the closure of the plants.
Frank Field has recently launched an inquiry into whether our pension (and more generally our welfare) system discriminates against younger generations.
For generations in retirement, ring-fenced from tax cuts by Government promises and ring-fenced from pension cuts from the PPF, the Bill Bryson vision of endless cruise trips is becoming a running sore for many younger people. I fear that the “bash the old” prejudices will grow and I fear that “bash DB” prejudices will grow in parallel.
It’s not just Tata Steel that has pension deficits. The PPF estimates that there are over 11m people in funded DB plans with over £1,000 billion in assets and liabilities. Nigel Wilson has estimated that the public sector unfunded DB promises are four times as much again.
Against these numbers, Tata Steel’s liabilities are a pin-prick, but the emotive debate will hi-lite what is often considered not just Brtian’s but the OECD’s macro-economic flaw, that we cannot afford to fund yesterday’s workers from today’s production.
This is not my headline but the title of a Reuters blog. I am not sure it is why Tata want to pull out of British Steel but it is certainly a contributory factor.
It is conceivable that the Government would intervene as it did with Royal Mail and take pensions out of the equation, but this would run foul of EU competition laws as (unlike Royal Mail), there is no question of these liabilities being the state’s problem.
More likely, there will be the mother of all battles at the Pensions Regulator to provide Tata or any potential purchaser with some kind of deal on pensions. Inevitably this will mean compromising somebody’s security.
Let’s hope it doesn’t mean further compromising the fragile integrity of our pension system.
And don’t forget that it is Tata Consultancy Services that administers NEST.