Though the details of Tata’s offer to the members of the British Steel Pension Scheme (BSPS) are only sketchy , it is clear that they are focussed on members getting “PPF+” on existing benefits and a defined benefit pension against future service.
The deal looks similar to that offered to members of Royal Mail’s scheme and looks- as Steve Webb says to Professional Pensions
“a much better solution than the idea of a ‘zombie’ pension scheme with no sponsoring employer or a special deal done for one pension scheme, which was the government’s original plan last year. The potential impact on the PPF is now much reduced and many pensioners will get a better outcome than they would have done”
Not the deal some expected
The deal will confuse those who saw the options open to the Regulator as binary “Zombie of Lifeboat”. Writing in the FT John Ralfe asserted in April
The regulator can only approve a deal if it meant the pension scheme got more cash than if Tata Steel UK simply went bust, and the pension scheme got its share of assets as an unsecured creditor, and by calling any guarantees from group companies.
Under the proposed deal Tata Steel would pay £550m into BSPS as well as provide it with a 33% stake in Tata Steel UK.
Tata Steel UK has also agreed that following the RAA it would sponsor a new scheme and would offer members of the BSPS an option to transfer into this new scheme.
This is a far cry from the £1.5bn cash injection that John supposed the PPF would demand to keep BSPS from its clutches.
The PPF’s new rules for zombie schemes — cleverly designed to minimise its risk — mean the British Steel Pension Scheme would have to start with a surplus against the assets needed to pay the PPF level of benefits.
In December 2015 the pension scheme had a £1.5bn PPF deficit, which will be at least that today. For the pension fund to qualify as a zombie scheme, Tata Steel would have to inject at least £1.5bn cash, and possibly a lot more, depending on the cushion the PPF requires.
How will members and their representatives react?
Tata states in its latest accounts that the deal has been agreed in principle with both the Pensions Regulator and the Pension Protection Fund but that it is subject to approval of the stakeholders of the new RAA. Tata concludes that there is
“presently no certainty with regards to the eventual existence, size, terms or form of the new scheme”.
The new scheme would have lower future annual increases for pensioners and deferred members than the BSPS but offer better than PPF benefits as well as significantly less risk for Tata.
Importantly, the BSPS Trustee chairman Allan Johnson is recommending the terms of the new arrangement to members. This is no tick in the corporate box, Tata is one of the best run pension schemes in Britain, it’s operating costs per member at £63 are amongst the lowest to its sponsor. Members have every reason to consider Johnson has been acting- as a trustee should, in their best interests.
To what extent Tata are sponsoring the new scheme – as opposed to setting it up and walking away – is unclear. That is presumably the quid per quo for not stumping up the £1.5bn that the PPF are said to have originally demanded for an RAA solution.
But the matter is not open and shut and members appear to be free to choose the PPF instead (as they were in the Kodak case – where the business similarly became an asset of the scheme).
John Ralfe, writing in the FT in April, claims that all 70,000 members already drawing a pension, and many of those wanting to take early retirement, would be no better off, and around 6,000 would be worse off than going into the PPF.
TPR also point out that should the RAA fail, the impact on the PPF could be much worse than the current “deficit” it calculates for the scheme.
What is clear is that Tata are avoiding going into administration and “pre-packing” its pension liabilities into the PPF. This is surely a step in the right direction.
BSPS – a healthy scheme
As I’ve mentioned above, BSPS is a well run scheme, it has low operating costs and a relatively low PPF deficit to its £15bn size. As we pointed out last month, this PPF deficit is actually a surplus if considered using the FABI basis of valuation.
In April First Actuarial wrote on this blog
reports of an offer by Tata Steel to make a one-off payment of £520m into its £15bn UK pension scheme – the British Steel Pension Scheme (BSPS) – have been criticised as not going far enough to plug its funding deficit nor sufficiently protecting the Pension Protection Fund, with suggestions that its funding deficit could increase to as much as £2bn at its 2017 actuarial valuation.
First Actuarial have estimated that using assumptions in line with those used for the FAB Index, the BSPS could easily have a surplus of £2bn calculated on a best-estimate basis. Whilst not necessarily suitable for funding purposes, it does demonstrate that more context needs to be given when reporting on the financial position of UK pension schemes.
It would have been a great shame if the BSPS had gone into the PPF, because so much of it is good. That it looks like staying outside the PPF (at least for members who choose to stay in the RAA) is also good.
It is good that Tata are agreeing to risk sharing and that PPF and tPR are finding a way for that to happen.
It is good that the Trustees are a party to this solution and recommending it.
Let the members decide
Finally it is good that the make or break of this deal is in the hands of the members. It is clear they will be taking more of the risk themselves, at least in having to cover the shortfall between what they would have got and the terms of the new arrangements.
Some will argue- as John has argued- that the PPF presents a safer harbour and that reliance on a private arrangement is too risky.
The employer representatives (the Unions) could say no collectively. But ultimately it will be down to individual members to decide what is best for them; which – provided the choices are clearly laid out- is good for them.
FT article “It’s Zombie versus Lifeboat” by John Ralfe (April) here; https://www.ft.com/content/5019a6de-250d-11e7-8691-d5f7e0cd0a16
Professional Pensions article on the RAA deal (May) here; http://www.professionalpensions.com/professional-pensions/news/3010222/british-steel-pension-scheme-moves-step-closer-to-raa-after-terms-agreed