The British Steel Pension Scheme (BSPS) has pledged to overhaul its asset allocation, placing a greater emphasis on cashflow-generating assets to avoid entry into the Pension Protection Fund (PPF).

Trustees of the £13.6bn (€17.3bn) scheme said they were in discussions with the UK government and the Pensions Regulator regarding a new investment strategy, which would look to match the fund’s cashflow or eventually allow for trustees to complete an insurance buy-in or buyout.

The discussions come as a UK government consultation to change the rate of inflation indexation draws to a close, months after sponsor Tata Steel announced its intention to sell its UK business.

If no buyer were found and the UK sponsor became insolvent, the BSPS could be forced to enter the PPF.

Allan Johnston, chair of trustees at BSPS, said a large majority of the scheme’s members would be better served by the fund’s remaining outside the PPF.

In their response to the government consultation, the trustees argued that a range of changes – including amending the rate of indexation – would eradicate the deficit and leave it “funded on a self-sufficiency basis”.

This is likely to be a reference to the £485m shortfall reported in March 2015 when measuring funding on an ongoing basis.

The trustees also argued that, while the scheme did not have sufficient assets to agree a buyout guaranteeing benefits above PPF level, it would be able to pay members higher benefits on an ongoing basis than those paid through the lifeboat scheme.

The consultation response adds: “We are currently discussing with the Pensions Regulator and the government [on] how we would restructure our investments so that we hold assets that can be expected, with a high degree of confidence, to generate cash inflows matching the cash outflows of our benefit liabilities for the natural lifespan of the scheme.”

It says it will also examine the possibility of completing a buy-in or buyout when it becomes “possible and sensible” and that, unlike the PPF, it will reduce risk compared with the PPF by hedging its longevity risk.

According to the fund’s most recent annual report, BSPS had more than 60% – or £8.4bn – of its assets in bonds as at the end of March.

A further £3.4bn was invested in equities, £1.3bn in property and nearly £380m in pooled investment funds.

It also had a relatively small, £130m cash holding.

The trustee’s response concludes: “Our proposals, for the BSPS to stay out of the PPF, therefore involve less cost and less risk for the PPF and its levy payers than immediate PPF entry and would be beneficial to the PPF and to PPF levy payers.”

Johnston argued that BSPS was a “very large, well-funded scheme”.

“If our proposals are implemented,” he added, “the vast majority of members would be better off than going into the PPF.

“We welcome the government’s consultation and expect to satisfy the government and the Pensions Regulator that, if BSPS stays out of the Pension Protection Fund, it can be financially self-sufficient and is most unlikely to go into the PPF at any time in the future.”

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