Manufacturing organisation Tata Steel has offered to pay £550 million to the British Steel pension scheme (BSPS) to meet conditions of a regulated apportionment arrangement (RAA), which has been agreed in principle.
The defined benefit (DB) pension scheme closed to future accrual on 31 March 2017 following a consultation process. In February 2017, members of trade unions GMB, Unite and Community voted to accept a pension proposal that included the closure of the DB scheme to future accrual and the establishment of a new defined contribution (DC) scheme.
The RAA would separate the pension scheme from Tata Steel. Commercial terms for the RAA have been agreed in principle between the BSPS trustee, The Pensions Regulator (TPR), and the Pension Protection Fund (PPF).
Although the arrangement has been agreed in principle, the RAA is still subject to detailed documentation, formal approval by TPR, and non-objection from the PPF before it can become effective. The RAA also requires the formal agreement of the individual entities who would be party to the arrangement before it can be completed.
The RAA would come into effect following the necessary agreements and approvals, and after agreed conditions have been met. This includes a £550 million payment from Tata Steel to the BSPS, and the BSPS being awarded a 33% equity stake in Tata Steel UK.
Tate Steel UK has also agreed in principle to sponsor a new closed pension scheme for members and pensioners of the BSPS, which would be created after the RAA has been implemented. The new pension scheme would have lower future annual increases than the BSPS for both pensioners and deferred members, creating an improved funding position and less risk for Tata Steel UK.
The new scheme would be subjected to certain qualifying conditions. If these conditions are not met then the new pension arrangement would not be created and members would receive PPF benefits.
If the new pension scheme does come into effect, BSPS members and pensioners would be able to either opt in to the new scheme voluntarily, or remain in the BSPS to receive PPF compensation.
Allan Johnston, trustee chairman of the BSPS, said: “I am pleased that agreement in principle has been reached with [Tata Steel UK] about sponsorship of a modified pension scheme subject to qualifying conditions. Although the PPF is an important safeguard for pension schemes generally, the trustee believes that the BSPS has sufficient assets to offer members the potential for better outcomes by enabling them to transfer to another scheme offering modified benefits. For most scheme members, these modified benefits are expected to be of greater value than those they would otherwise receive by transferring into the PPF.
“[Tata Steel UK’s] willingness in principle to sponsor a new scheme post RAA, subject to conditions agreed with the BSPS trustee, paves the way to allowing members to make a choice based on their personal circumstances. Discussions are progressing constructively and we expect to be in a position to communicate the final outcome to members soon.”
Koushik Chatterjee, group executive director, finance and corporate, at Tata Steel, added: “A significant milestone during the quarter was the completion of the consultation process and closure of the defined benefit scheme in the UK to future accruals. All employees in the UK can now opt into a defined contribution scheme. We are in positive discussions with the BSPS trustee, The Pensions Regulator and the Pension Protection Fund in relation to an RAA, and are hopeful of reaching final agreement shortly.”
Spokespeople for the National Trade Union Steel Coordinating Committee (NTUSCC), added: “This announcement is a stepping stone in the process to secure BSPS members’ benefits in a new modified scheme sponsored by Tata Steel UK. The Pension Protection Fund (PPF) has a vital role in protecting people against losing their pension should their employer go bust. However, we should be clear that when the trade unions voted to accept Tata Steel’s turnaround plan our members did not vote to allow Tata to put the BSPS into the PPF and end their responsibilities to scheme members.
“On the contrary, the agreements we have reached with Tata are based on the understanding that all members will have the opportunity to choose whether to move to a new modified scheme or remain in the BSPS and so enter the PPF. This is the commitment Tata has given to the workforce and the trade unions will hold them to the promises they have made.”