I was sent an announcement yesterday about the new British Steel Pension Scheme. It’s a complicated message and I’ve tried to add comments that explain what each paragraph means in a little easier way. My comments are in green. They are simply my reaction to what I’m reading. It’s not my company’s and I’m trying to give a blogger’s opinion.

I’ve used the £2.2bn surplus number that’s in Tata’s accounts and confirmed in the FT.

Announcing its financial results on Wednesday, the Mumbai-based group said the new UK scheme had a £2.2bn non-cash accounting surplus.

There have already been  calls for this surplus to be promised to members as improved benefits. The announcement from the Trustees (below), explains why everyone should hold off.

The £2.2bn is a Tata number , not a Trustee number. Surpluses can go down as well as up and the point of the buffer is to provide protection for scheme members who – without one – would be sailing close to the wind – or the PPF.  Don’t forget that Tata are unlikely to withstand any cash-call from the Trustees if the Scheme gets into trouble and could declare itself bust rather than bail the scheme out.

The announcement is below.

Tata Steel has today announced its financial results for 2017/18, which reflect the changes affecting the Old British Steel Pension Scheme, which has now entered a Pension Protection Fund (PPF) assessment period, and the launch of the new British Steel Pension Scheme.

You’ve had your time to choose and things have happened as planned. You’re either in the PPF waiting room, in BSPS2 (now New PPF) or you’re away with your transfer.

The new BSPS was set up to have sufficient assets from the outset to pay benefits over the lifetime of the Scheme using a low-risk, cashflow-driven investment policy with a prudent buffer (or funding surplus) to cover risks.

The scheme’s funded with a buffer. The buffer is around £2.2bn more than what’s expected to be needed. This is slightly higher than the anticipated £2bn – which is probably a positive impact on the up to £3bn transferred out of the scheme – which didn’t go out at the full rate (you remember there was a 5% retention because there were insufficient assets in the old scheme to pay full shares).

The new scheme will be more cautiously invested (low-risk) and it won’t be investing so much as planning to meet pension payments (most people in NewBSPS) are pensioners. That’s what’s meant by “cashflow-driven”.  All this is said to give you confidence that New BSPS should not get into trouble

The BSPS is sponsored by Tata Steel UK Limited (TSUK), whose parent, Tata Steel has today announced its financial results for the year to 31 March 2018.  The announcement contains information about the Group’s pension arrangements including the BSPS. They show the effect of separating Tata Steel from the Old BSPS and they reflect a large surplus in the new BSPS.  That surplus was calculated using best estimate assumptions in accordance with accounting standards applicable to Tata Steel’s own accounts.

“Best estimates” means that the scheme’s assets and liabilities are based on the likely returns on the new investment strategy. We’ve just been told that this strategy will be cautious and that means that a lower return is anticipated. What this is saying is that Tata has established the new valuation (and the surplus) and thinks it realistic – this is the prudent way of doing things (according to them)

The way Tata Steel treats its pension arrangements in its own accounts is irrelevant to the way that the Trustee looks at the financial health of the BSPS.

This is the Trustees way of saying “we’ll be the judge of that”. The Trustees aren’t saying that Tata are wrong in their valuation of the surplus. But they will be challenging the valuation – they will be protecting scheme members from any dodgy accounting from Tata.

The Trustee’s first formal actuarial valuation of the BSPS, as at 31 March 2018, is now under way.  Actuarial valuations require the use of prudent assumptions rather than best estimates.  The Scheme’s 2018 valuation is expected to show that, even when using prudent assumptions, the Scheme still has a funding surplus on an on-going basis.

The Trustees will use  more “prudence”, this means that they will value the assets and the liabilities (liabilities = the expected amount the scheme will have to pay out). They may challenge the expectations of investment growth, the average survival rates of pensioners inflation expectations and much more. What they are saying is that they will be doing the due diligence on the Tata numbers on your behalf. Even though the Trustees surplus will be lower than the £2,2bn that Tata estimate, they  still expect to say that the scheme is alright and will pay out in full.

The security of members’ benefits depends on the Scheme’s funding position, the way assets are invested and the financial strength of the Scheme’s sponsor.  If TSUK were to become insolvent, the Trustee would be required to use the Scheme’s assets to secure benefits with an insurance company.  An indication of the security of members’ benefits is how the amount of assets compares with the cost of buying insurance policies that would secure all members’ benefits in full.  The 2018 valuation is expected to show that the Scheme has a shortfall on this buy-out basis, even though it has a surplus on a prudent on-going basis.

This is tricky. Even though Tata said they were walking away from the scheme, they haven’t. They are still on the hook to pay in some money – why they’re called the Scheme’s sponsor. If Tata went bust, the scheme would have to be self-sufficient. That would mean it would need to be bought out by an insurance company who would demand a lot more “prudence” even than in the Trustee’s valuation.  The Trustees are warning you that the “surplus” is not big enough for the Scheme to fall into the PPF – if Tata went bust.  New BSPS members need Tata to succeed if they aren’t to be back where they were a year ago.

The new BSPS was designed to qualify for protection from the PPF so that, if TSUK were to become insolvent and the Scheme’s assets were insufficient to secure benefits in full with an insurance company, members would receive at least PPF level compensation. Although there is now no reason to expect that TSUK will become insolvent in the foreseeable future, the Trustee cannot ignore the risk of that happening.  The Trustee is seeking to ensure that members will receive their benefits in full in all circumstances.

This is the Trustees saying that the “sponsor covenant” – the financial strength of Tata, has improved sufficiently for the Trustees to be confident that Tata won’t go bust in the foreseeable. This is purely a matter of good fortune for the Trustees – though it could be argued that the whole palaver of the RAA – kept the show on the road and avoided Tata going bust last year ( you can have your own views on this – it looks a bit political to me!)

In any case, you need to be aware you aren’t out of the woods yet and if you are in New BSPS, you still need to keep an eye on Tata.

The results of the 2018 valuation are expected to be communicated to members in the early part of 2019.

You may be wondering why you have to wait a year for this. So do I! Actuaries like to do things thoroughly and so do trustees and employers. There’s not much you can do in the meantime and frankly what goes on behind the scenes shouldn’t be a worry.

The BSPS Trustee was satisfied that separation of the old BSPS from Tata Steel was necessary to avoid an insolvency of TSUK.  The terms agreed for separation secured a better outcome for the BSPS and its members than TSUK insolvency and was the best outcome that could be achieved in the circumstances.

For the vast majority of members this was and is true. Without trying to big-up your trustees, they have seen through the RAA and though an awful lot went wrong at the detailed level, though many people are still confused and angry, this note goes some way to explain that there should be no nasty surprises going forward.

My summary of the situation

As an independent reader, with a little bit more experience than the average member (but a lot less experience of BSPS, New BSPS and the wonderful world of Tata than steel men have), I would still look on the note and the situation that the Trustees have created for you, with grim satisfaction.

If you think there is too much uncertainty about being in New BSPS, you can still walk away with a transfer value. The old Trustees said you would likely get a lot less from the New BSPS than the old, that has yet to be tested.

That said, I would urge extreme caution about giving up on New BSPS. It is not as good a Scheme as Old BSPS, but it is a lot less likely to go bust. It  should pay you a pension for the rest of your life and – if all goes well – that buffer may end up being distributed to New BSPS members.

It could have been a lot worse!