Tata Steel gains initial approval for pension scheme restructure

Tata Steel

Tata Steel UK and trustees of the British Steel pension scheme (BSPS) have agreed a restructuring deal, which has been granted initial approval by The Pensions Regulator (TPR).

Under the agreement, Tata Steel UK will pay £550 million to the British Steel pension scheme (BSPS) to meet conditions of a regulated apportionment arrangement (RAA).

The defined benefit (DB) pension scheme was closed to future accrual on 31 March 2017 after a consultation process. Members of trade unions GMB, Unite and Community voted to accept a new pension proposal in February 2017, which involved the closure of the DB scheme to future accrual and the creation of a new defined contribution (DC) scheme.

The RAA, which is expected to gain formal approval from TPR in 28 days, will separate the pension scheme from Tata Steel UK. The terms of the RAA were agreed in principle in May 2017 between the BSPS trustee, TPR, and the Pension Protection Fund (PPF). Under the terms, the pension scheme would receive £550 million from the Tata Steel Group, which indirectly owns Tata Steel UK, and the scheme would also be awarded a 33% equity stake in Tata Steel UK.

Following the completion of the RAA, which is expected to be effective around 11 September 2017, the scheme’s 130,000 members will be able to choose whether they wish to transfer into a new pension scheme sponsored by Tata Steel UK, or remain in the existing scheme which will be transferred to the PPF.

The existing pension scheme will continue to pay full benefits until the PPF assessment period in March 2018. After this date, the scheme benefits will be at the amount the PPF will pay under its compensation limits. Members who switch into the new scheme will not be affected by this.

Access to the new scheme will be subject to the scheme being able to satisfy certain qualifying conditions, for example around its funding level and size. Joining the new scheme has the potential to allow members to receive higher benefits than if they were to join the PPF.

TPR granted clearance for the new pensions proposal after ensuring that the plan met strict criteria designed to stop employers abusing the RAA mechanism. This included that the business would have become insolvent within the next 12 months if the RAA did not take place, leaving the pension scheme without its sponsoring employer.

The Tata Steel Group has no legal obligation to fund the BSPS or to provide support to Tata Steel UK because it is not the statutory employer. The Tata Steel Group refused to issue ongoing funding to Tata Steel UK until the funding challenges around the pension scheme had been addressed.

The pension scheme trustees will communicate with the scheme members, 80,000 of which are pensioners, in the next few weeks in order to explain the available options and next steps.

Allan Johnston, trustee chairman of the BSPS, said: “The BSPS trustees are pleased that Tata Steel UK has agreed to sponsor the new scheme, subject to qualifying conditions. Although the Pension Protection Fund is an important safeguard for pension schemes generally, the trustees believe that the BSPS has sufficient assets to fund benefits in the new scheme that will be better that PPF compensation for most members, and to do so on a low-risk basis sustainably into the future.

“We are satisfied that separation of the BSPS from Tata Steel is necessary to avoid an insolvency of Tata Steel UK. The terms agreed for separation will secure a better outcome for the BSPS and its members than [Tata Steel UK] insolvency. It is the best outcome that could be achieved in the circumstances.

“BSPS members are not being asked to make any immediate decisions. For almost all pensioners, the choice will be straightforward. For other members, however, the best choice will depend on their personal circumstances and preferences.”

Koushik Chatterjee, group executive director at Tata Steel, added: “The RAA process has been a long and detailed one, and I would like to thank the Pensions Regulator, Pension Protection Fund, the Trustee of the British Steel pension scheme, its members, the unions and employees, indeed, all our stakeholders, including the governments of the UK and Wales, for their constructive engagement through the process.

“Considering the continued challenges in the global steel industry as well as the uncertain global politico-economic environment, the RAA presents the best possible structural outcome for the members of the British Steel pension scheme and for the Tata Steel UK business.”

Lesley Titcomb, chief executive officer at TPR, said: “We do not agree to these types of arrangements lightly but after several months of robust negotiations in this case, we believe that it is the best possible outcome for everyone involved in what is a very difficult situation.

“TPR is willing to work closely and constructively with employers who face real challenges in meeting their pension obligations due to difficult trading conditions. Our focus will always be on protecting members and the PPF. We have worked closely with the scheme trustees and the Pension Protection Fund to maximise the value received by the scheme.

“This proposal brings greater certainty for pension scheme members and unlocks the possibility of restructuring the [organisation], which in turn could lead to preserving jobs. We are pleased that the employer has also agreed to sponsor a new scheme which has the potential to deliver higher benefits than PPF levels.”

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A spokesperson for trade unions Community, GMB, and Unite, added: “We welcome the RAA announcement which includes a commitment that Tata will stand behind a new scheme with reduced annual increases. For over a year our members have feared for their security in retirement, and this announcement helps to bring that uncertainty to an end.

“We fought to ensure that our members can choose whether they want to transfer to a new modified scheme, underpinned by Tata, or to remain in the BSPS and therefore receive PPF compensation. Now that this choice is being delivered, the [organisation] and the trustees must step up to provide the necessary information and guidance to enable every member to make an informed decision in their best interests.”