BSPS members down but not out

The deal facing members of the British Steel Pension Schemes(BSPS)  isn’t great , but it’s a whole lot better than that predicted.

What’s clear is that there won’t be much future accrual of defined benefits, people  will get a 10% employer contribution into a DC plan which is a whole lot more than most people get but considerably less (for most) than the value of a defined benefit accrual.

This looks non-negotiable; no pensions deal, no job; no job, no future accrual; this is “take it or take less” territory.

Going forward , Tata Steel workers still in a job will at least get an adequate pension contribution and those who have left look like they might even be spared the haircut of the PPF.

Here’s why members don’t want to go into the PPF

Members who have reached their scheme’s normal pension age, will generally receive 100 per cent compensation for what they should have received at the time their employer went bust.

Typically, the PPF, will also pay 100 per cent compensation to those who have retired on legitimate ill-health grounds, regardless of age, and those receiving a pension in relation to someone who has died at the time that the employer went bust.

Members who have not yet retired will receive up to 90 per cent compensation on reaching retirement age.

But these 90 per cent compensation levels are also subject to a cap which is recalculated every year for new pensioners this cap.

The cap at age 65 is, from 1 April 2014, £36,401.19 (this equates to £32,761.07 when the 90 per cent level is applied) per year. The earlier you retired, the lower the annual cap is set, to compensate for the longer time you will be receiving payments.

You can view a full list of the compensation caps for each age here.

Here is the most important bit.

Your payments relating to pensionable service from 5 April 1997 will then rise in line with inflation each year, subject to a maximum of 2.5 per cent a year. Payments relating to service before that date will not increase.

Don’t kid yourself that that’s pain tomorrow – that’s a lot of pain tomorrow

Could Tata sink the PPF?

The definitive answer to that is “no”

The PPF would ( I suspect) love to get its hands on the British Steel Pension Scheme. The current deficit is technical , there is a hole in the funding but not an irreparable home and it now appears that the scheme has a charge on a Tata owned plant in Holland

Although the trustees declined to disclose the value of the guarantees, two people briefed on the situation said they were equivalent to 30 per cent of the value of Ijmuiden. The net assets of the Dutch plant were valued at €2.1bn (£1.7bn), according to its latest business accounts.

FT;  https://www.ft.com/content/3db599be-bd64-11e6-8b45-b8b81dd5d080

The reported deficit of the scheme in May was £700m (the amount to make the scheme self-sufficient). The FT reported that it would take a massive £7.5bn to buy-out the liabilities through an insurance company.

By my reckoning, were Tata to pay an amount adjacent to the cost of the charge on its assets into the scheme (as a divorce payment) , the scheme would be considered pretty well self-sufficient). In today’s uneasy climate for DB schemes would be something.

The Trustee’s are still claiming that the most likely outcome would be the scheme going into the PPF but this looks like “expectation management” to me.

Should Tata agree to run the UK business as a going concern and the pension scheme be seen to be self-sufficient, then the risks to Tata of its own scheme, shorn of any liabilities to future DB accrual, seems low.

Without the threat of the Pension Scheme dragging down not just the British but also the Dutch business, Tata may consider that it is a risk worth taking.

Ironically, the best thing for the PPF may be that it takes on the well run British Steel Scheme with reduced liabilities and the prospect of the valuation of those liabilities reducing further if interest rates start rising.

All at sea , but the waters are calming!

It looks like the ship is still close to the rocks but the storm is subsiding. The ship is not on the rocks but the salvage craft are in attendance.

The delicate negotiations going on between trustees, employer and member representatives are being closely watched by the Pensions Regulator and the PPF is standing by.

My hope is that what will come out of this , will be the commitment of Tata, not just to save the business but to save the pension scheme. If the business is maintained and the scheme goes into the PPF, then it will be under an artificial arrangement known as a pre-pack which will further undermine confidence in pensions. If the business and trustees can come to an agreement which ensures that the pension scheme is no immediate threat to Tata in the UK and the Netherlands, then we have a happy outcome.

The long-term forecast is still stormy, there are many other Tata’s, as Professor Blake of Cass constantly reminds us. But the situation is stabilising and the last word should go to Andrew McKinnon , CFO of the PPF.

“2016 has been an interesting year for defined benefit pensions. While scheme funding remained largely stable in the year to March, there have been large swings in funding since June. When we look back at what progress schemes have made over the last decade it appears that many schemes are just treading water. The average recovery plan length, at around eight years, has barely improved, which brings home the challenge we now face.

In my opinion, the capacity of our DB schemes to survive and prosper is down to the collective will of those who run them. Tata is a test case of that resolve.