News that Pension Insurance Corporation (PIC) has rescued those former members of the British Steel Pension Scheme who are currently in the PPF assessment period has been widely promoted by PIC’s financial PRs and got some favourable coverage in the Daily Mail
Indeed the internal mail sent to PIC staff jubilantly boasted
The Daily Mail had a particularly good quote: “An industry source said the deal would be ‘like Christmas’ for those who had been expecting to receive the PPF’s terms.”
But I’m not so sure that’s how all the 30,000 members of the Old British Steel Pension Scheme will see things. Back in 2017, ,these members were asked to choose between moving into the new BSPS and staying put, the default position was staying put, which meant that deferred members who did nothing risked getting a lower pension from the PPF. Most deferred members agreed to join the new scheme or simply didn’t make a choice and stayed where they were.
But some members took an active choice to see their pension going into the PPF – which is now not going to happen. So why would anyone want to take a benefit haircut of 10% or more? The answer can be found in a comment by Eugen Neagu on the Steelworkers own Facebook page
I re-read this. If I am right, this applies to the Old BSPS, not to the New BSPS. So it applies to the members who chose the PPF either who chose PPF, or by default (by not making any choice)? Am I wrong?
It is very possible that commutation coefficients and early reduction factors that PPF offered may not be available now, as PIC will use its shoddy commutation factors and early retirement coefficients!However, as it is a buy-in, this will mean more transfers would be allowed by Old BSPS.We certainly need more clarification at this moment.
Eugen is spot on, what we have is a press release from PIC, long on self-congratulation but short on detail. This is a deal that has been done behind closed doors with the “Open trustees” who now look after member interests.
Open Trustees Limited has been the Scheme’s Trustee since 29 March 2018. It is an independent entity but is wholly owned by international law firm, Osborne Clarke LLP. The Trustee was advised by Barnett Waddingham LLP and Hogan Lovells
Without impugning the integrity of any of these organisations, I doubt that any of them have set foot in Scunthorpe or Port Talbot and that the any of the 30,000 impacted members have a clue who has been negotiating on their behalf. I question how open “Open Trustees” have been or could be.
The deal may have been reported as a win-win for the PPF, trustees and for the members but the FT was more cautious
We are yet to be told exactly how many of BSPS’s 31,000 members will see an uplift in their benefits as a result of their scheme spending £2bn on an insurance deal, to lift them out of the lifeboat scheme.
— Josephine Cumbo (@JosephineCumbo) October 22, 2020
and Jo Cumbo clearly shares some of my scepticism
Indeed! Clarity is needed over the situation for people who went down PPF route for this reason.
— Josephine Cumbo (@JosephineCumbo) October 23, 2020
Deals like this are not done altruistically, there is money being made from this buy-out and it is being made for the shareholders of PIC.
The PPF is a not for profit organisation which has an outstanding reputation for service (congrats to COO Sara Protheroe for her OBE this month) and a reputation for getting investment decisions right , delivering value for money and meeting its financial targets.
Members who have taken a decision to be in the PPF (a small minority of the 30,000) should be allowed to choose to stay in the PPF, they should not be required to accept terms which they previously rejected or be subject to the rules and service of an insurer who they have no knowledge of.
If this doesn’t happen, they might reasonably ask, why were they asked to choose in the first place, a question many of us have been asking for a long time!
Whether which of the members will be better off remains to be clarified.
What is more apparent is the PIC has jumped the gun in splashing their news when it should be the members who get told first by the Trustees and not read it in the press.
Not a good sign from Open Trustees despite their name. There’s no transparency or detail and again the lives of the British Steel workers have been out in turmoil.
Would it be possible for the Pension Insurance Corporation to use “shoddy commutation factors and early retirement coefficients” which do not match or better those of the PPF?
I ask this after reading the following information on the Barnett Waddingham website:
October 22, 2020
The OBSPS is expected to exit its Pension Protection Fund (“PPF”) assessment period and secure a full buyout next year, having agreed a £2 billion pension insurance buy-in with insurer, Pension Insurance Corporation plc (“PIC”).
The deal completed on 8 October 2020. The buy-in secures the liabilities of over 30,000 members at or above PPF levels of compensation.
The OBSPS entered a PPF assessment period on 29 March 2018, as a result of the restructuring of the UK operations of Tata Steel UK Limited agreed with the Pensions Regulator and the PPF.
During the Scheme’s PPF assessment period, it became apparent that it might be possible to buy-out members’ benefits at or above PPF levels of compensation.
A significant amount of work has been undertaken investigating this possibility by the trustee of the OBSPS and its advisers. The buy-in should ultimately result in a better outcome for members than they might otherwise have been expecting.
Members were first informed about the possibility of a buy-out in April 2020. Members are being directly notified about this significant step taken with PIC and what it will mean for them.
Whilst all members’ benefits have now been secured at or above their current PPF levels of compensation with PIC, the exact outcome for each member will not be known until the buy-out occurs. This is expected to happen towards the end of 2021, as further work is still required before the OBSPS can be fully transferred to PIC. During this period, the Scheme will remain within its PPF assessment period and continue to be protected by the PPF.
Open Trustees Limited has been the trustee of the OBSPS since 29 March 2018. It is an independent entity but is wholly owned by international law firm, Osborne Clarke LLP. The transaction was led by Barnett Waddingham.
Jonathan Hazlett, Managing Director of Open Trustees said: “When we were first appointed as trustee of the OBSPS, we anticipated that the PPF would assume responsibility for OBSPS. However, better than expected funding levels coupled with the adoption of scheme-specific mortality assumptions have meant that a wind-up outside of the PPF became possible.”
“We are delighted to have entered into this buy-in policy with PIC. This transaction will eventually see OBSPS members receive benefits either at the same PPF level as those currently provided or, for many members, an uplift above that amount. It has been difficult for the OBSPS members over the last few years. Whilst the PPF provides a valuable safety net and a significant level of protection, many members will now receive higher benefits than they might otherwise have expected had the Scheme entered the PPF. OBSPS members can take comfort that their benefits will be looked after by an insurer, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority, as well as being committed to the highest levels of customer service.”
Rosie Fantom, Partner at Barnett Waddingham, said: “Barnett Waddingham has worked closely with Open Trustees to secure the best possible outcome for the OBSPS members. Identifying the OBSPS as a potential candidate for wind-up outside the PPF was the first step, followed by putting in place a strategy to manage the asset risk whilst the scheme prepared for the transaction.
“This is a significant step in what has been a long journey for OBSPS members, who now have the certainty that their benefits have been secured with an insurer on very favourable pricing terms in a turbulent market. Rigorous work carried out over the last two years allowed the scheme to take full advantage of bulk annuity pricing.”
Uzma Nazir, Head of Origination Structuring at PIC, said: “This is a significant transaction, guaranteeing the benefits of the more than 30,000 pension scheme members who have faced a long period of uncertainty about the level of their benefits, and providing many with an uplift over PPF levels. We are delighted to have been able to work so closely with the Trustee and Barnett Waddingham and ultimately deliver what was required in the biggest and most significant transaction of the year.”
https://www.barnett-waddingham.co.uk/comment-insight/news/client-news-OBSPS-agrees-ps2-billion-buy-in/
I think it probable that most members will be better off from the buy-out , but a buy-out was not what members were promised in 2017 and for those who actively sought the terms offered by the PPF, the PPF may remain more attractive. It should be remembered that BSPS2 could go into the PPF while OBSPS pays out at original levels – that would be a very sad and a little ironic.
As the ‘buy-in’ secures the liabilities of over 30,000 OBSPS members at or above PPF levels of compensation, I would have thought that all of these members will at least be no worse off and possibly better off? I assume this includes early retirement factors etc?
I think many BSPS2 members are aware of the possibility that the new scheme could fall into the PPF which would be very sad indeed! (Hopefully this won’t happen). Some ‘deferred members’ are probably thinking whether or not they should transfer out whilst they can? This has been through my head many times but I’ve remained with BSPS2.
The title of your blog is ‘Why Steelworkers should question this pension buy-out’. I thought this was a buy-out but it’s actually a buy-in and I wasn’t too sure what the difference is? For my own reference I researched the Barnett Waddingham website which says this…..
Buyouts and buy-Ins:
To remove the risk of further rising costs, sponsors are increasingly looking to insure some or all of their pension scheme obligations with a specialist insurance company. A premium is paid to the insurer to complete such a transaction. These types of transactions are known as bulk annuity policies and can be structured in two ways: through either a buyout or a buy-in.
With a buyout, the scheme’s liabilities are transferred to the insurer and the sponsor’s obligation to the members is extinguished. The terms of the insurance policy are required to precisely match the form of the members’ benefits under the scheme. Securing such a policy arrangement can be a long, protracted process. A buyout normally precedes a wind-up of a scheme and involves the entire scheme membership being covered by the policy. A buyout of only part of the membership is rare due to the fact that the scheme’s trustees could be seen to be favouring one group of members by providing them with increased security (i.e. those covered by the bulk annuity policy) over the remaining members.
Under a buy-in, the policy is held by the trustees and is effectively a scheme asset which pays the members’ benefits. In other words, the ultimate obligation to pay the members still remains with the scheme. A buy-in policy does not reduce the security of those members whose benefits are not insured by the policy, as income from the insurer can in theory be allocated across all the beneficiaries.
https://www.barnett-waddingham.co.uk/finance-directors-guide/liability-management-risk-reduction/buy-outs-and-buy-ins/
Robert, you are correct that under the buy-in the policy is held by the trustees and subject to the existing scheme rules for early retirement and commutation coefficients. But a buy-out with PIC will follow soon next year, and PIC’s terms would apply from that time.
I do agree with you that 91% or 92% of their pensions is great for the majority of people who have not reach retirement age, and will take benefits at 65, or have taken early retirement from the scheme before, some even at 60 from BSPS and with no early reduction, under the pre-2017 rules. Probably many people in the 60s have chosen BSPS2 anyway. Not sure what this will mean for people who were 65+ age old in 2018, who only lost indexation for pre-1997 service and have CPI instead of RPI etc, but remained on “100% benefits”? Will they get 102% now?
With regards of the BSPS2 falling into the PPF, the chances are next to 0%. In case that TSUK falls into administration, BSPS2 has enough funding to buy-in benefits above PPF levels, so it will remain as a Zombie scheme and probably will go through the buy-out route as well.
Henry. What about the past ‘Steelworkers’ who are already in the FAS/PPF? They amongst other qualifying company pensioners have been campaigning now for over 20 years via the Pensions Action Group (PAG) but the Pensions Minister (DWP) continue to ignore us and do not negotiate! This is after ‘judicial reviews’ Pensions Ombudsman and EU court favorable decisions that are still not being implemented by our government.
Peter D Beattie – FAS/PPF Pensioner and Military Veteran
Eugen,
According to the buy-out information provided on the Barnett Waddingham link I posted earlier, it says…….”The terms of the insurance policy are required to precisely match the form of the members’ benefits under the scheme.”
I understand this applies to all UK pension buy-outs and is enforceable by law? If this is the case then surely all BSPS2 members should have nothing to worry about as they wouldn’t be any worse off (including early retirement and commutation coefficients etc) as a result of a buy-out?
As the Old British Steel Pension Scheme (OBSPS) has recently agreed a £2 billion pension insurance buy-in with Pension Insurance Corporation plc, why would this be any different for BSPS2 i.e buy-out? Under a buy-in, the policy is held by the trustees and is effectively a scheme asset which pays the members’ benefits. In other words, the ultimate obligation to pay the members still remains with the scheme. A buy-in policy does not reduce the security of those members whose benefits are not insured by the policy, as income from the insurer can in theory be allocated across all the beneficiaries.
With regards to the loss of indexation for pre-1997 service etc, the British Steel Pension Scheme ‘Time To Choose’ booklet provided the following information which explains when the new scheme (BSPS2) might give extra money to members:
1. When the shares that the Trustee of the new scheme will hold in TATA Steel UK Ltd are sold, or dividends are received from those shares and this is enough to pay the extra benefits. The Trustee of the new scheme would decide which members would get a payment. Only members who built up some benefits before 6th April 1997 could be considered. The Trustee could pay a lump sum or promise a future lump sum or pay extra pension.
2. If the funding level on a buyout basis reaches at least 103%. This is a measure of the cost of purchasing annuity policies for all members with an insurer which would replace member’s pensions. The Trustee would decide which members would get an extra payment. All members could be considered.
3. If the outcome of the 31st March 2021 actuarial valuation is better than expected and no payment has been made under point 2 above. Pensioners who built up some of their benefits before 6th April 1997 could get this payment. The payment could be a lump sum or extra pension.
It’s good to hear that you think the chances of BSPS2 falling into the PPF are next to 0%. There has also been talk of BSPS2 continuing as a ‘stand alone’ scheme (without sponsor). Personally, I think this would be more beneficial for members instead of a buy-out etc. Can I ask what your opinion is on this?
Eugen,
In addition to my previous post, I can see that although a buy-in has been agreed for the Old British Steel Pension Scheme (OBSPS) it was done to progress towards a buy-out.
The following information is taken from https://oldbritishsteelpension.co.uk/faqs.html
“A new insurance policy moves us closer to a buy-out:”
“This progress towards a buy-out has been made possible by a new insurance policy we have arranged for the Scheme (known as a ‘buy-in’). On 8 October 2020 we bought this insurance policy from Pension Insurance Corporation plc (PIC). This policy means PIC will now be responsible for providing us with the money we need to pay benefits to our members. This is a big step towards the Scheme exiting its PPF assessment period and completing a buy-out. When the buy-out happens, PIC will take over paying benefits directly to members. The Scheme will then cease to exist.”
And…….
“Some retirement terms are changing from 1 January 2021:”
“If you’re not taking your benefits yet, you’ll have some choices when you do. These include when to start taking your pension and whether to swap some of your pension income for cash. If you decide to retire before or after your normal pension date, your pension is either reduced or increased to reflect either early or late payment.”
“From 1 January 2021 we are changing the terms for what these options give. If your retirement date is before 1 January 2021, you will still get the current Scheme terms. On average, the current Scheme terms are likely to be slightly more generous than the terms that will apply from 1 January 2021. However, this cannot be guaranteed, as the terms will change over time and vary from member to member.”
If the new British Steel Pension Scheme (BSPS2) follows in similar footsteps to the OBSPS, then as a deferred member (aged 53) who paid into the scheme for 30 years (10 of those prior to 1997) and is not taking any benefits yet, I don’t particularly like the sounds of this as my intention is to retire in 2 years time after 35 years unbroken service…..all of that being shift work.
Deferred members still have the option to transfer out if need be. This seems to be more appealing by the day!
Why is it that with regards to a buy-out ”The terms of the insurance policy are required to precisely match the form of the members’ benefits under the scheme”, yet this doesn’t appear to be the case?
It’s a long shot but I hope BSPS2 can continue as a ‘stand alone’ scheme as this once iconic pension scheme may be able to continue doing what it was designed to do?
Robert, yes the terms of the buy-out will match the exact terms of previous pension scheme. Your normal retirement age will not change, it remains age 65. The benefits will revalue till 65 at the same rates, and in payment, they will follow the exact same indexation rules.
However, the insurer could change its investment strategy, and to make a profit, it could take a bit more risk. It can also use a slightly different mortality table too, and it could change it as well as time passes by. So market assumptions could change as interest rates etc.
Early retirement and commutation factors are not guaranteed, the BSPS changed them several times, as the assumptions and asset allocation has changed.
I do not want to comment too much about what could happen with this factors, but my experience with PIC was not great so far. That is all I can say.
Even if you lose 2% or 3% more pension on early retirement, I am not saying that you should transfer. A transfer could remain unsuitable, even if benefits could be slightly lower.
Eugen,
Thanks for your reply.
In this case, I hope that BSPS2 has enough funding to allow a full buy-in (100%) of its benefits secured by an insurer and the scheme remains, instead of a buy-out from an insurer that can change the early retirement/commutation factors, investment strategy and mortality table, in order to make profits etc.
If your experience with the Pension Insurance Corporation (PIC) has not been great so far, I hope the BSPS2 Trustee is reading this blog.
Although I’ve thought about transferring out, I think it’s safer for me to stay with BSPS2 👍