The British Steel Pension Scheme (BSPS) could see its deficit hit £1bn-£2bn if its sponsor, Tata Steel, cuts all funding links, the scheme’s trustees have warned.

BSPS’ investment team successfully eroded almost its entire estimated shortfall over the course of last summer, but the trustees today warned that the deficit would widen again if they were not permitted to adjust benefits.

The £15bn (€17.6bn) scheme’s trustee board today wrote to members explaining its case for entering a “regulated apportionment arrangement” (RAA), allowing benefits to be “modified” to make them more affordable.

The trustees said they were “pressing” the Pensions Regulator and the Pension Protection Fund (PPF) for permission to establish a RAA.

Allan Johnston, chair of trustees, wrote in the letter: “Separation [from Tata Steel] through an agreed RAA, with members and pensioners able to have modified benefits in a new scheme, would be a better outcome than if Tata Steel became insolvent and the whole of the BSPS went into the PPF. That is why the trustees are actively exploring a potential RAA with Tata Steel, the Pensions Regulator, and the Pension Protection Fund.”

Johnston emphasised that the trustees would not agree to the RAA until it was satisfied that entry into the PPF was otherwise inevitable.

The RAA would involve the creation of a new pension fund. Members would then be given the choice of following the existing scheme into the PPF – which the trustees maintain is not necessary – or transferring to the new standalone fund.

The decision would most crucial for BSPS’ more than 31,000 deferred members, who would face cuts of 10% to their promised pension payouts in the PPF. Members who have already retired would be paid in full.

The BSPS trustees have previously proposed adjusting the scheme’s indexation rules to reduce its liabilities, but they have so far not made public any concrete proposals for what a RAA would look like.

Deficit dilemma

Crucial to the agreement of a RAA is the UK government’s review of defined benefit regulation, expected this year.

The Work and Pensions Committee – an influential group of politicians – published a report late last year calling for the RAA to be made more accessible for situations such as BSPS.

In its letter to scheme members, the BSPS trustees said its next actuarial valuation, to be calculated as of 31 March 2017, would have to take into account a change to a lower-risk investment policy and “build in additional prudence” if Tata Steel is successful in its bid to cut its ties to the scheme.

“Although the final position will not be known for some time after [31 March], recent funding updates show that the scheme would currently have a modest deficit if liabilities are valued using the same actuarial assumptions as were used for the 2014 valuation (adjusting for current market conditions),” the trustees said.

But the loss of its employer covenant would mean a deficit of “between £1bn and £2bn”. This would require annual employer contributions of between £100m and £200m a year for 15 years, the trustees claimed, which Tata Steel says it cannot afford.

Unions support scheme closure

Before any changes can be made to BSPS, it must be closed to future accrual. A consultation is currently underway regarding this proposal, and workers’ unions today recommended their members accept the closure.

The Unite, GMB, and Community unions said in a joint communication to members: “It is our collective view, supported by our independent experts, that this is the only credible and viable way to secure the future”.

Tata Steel’s proposal also included introducing a defined contribution (DC) scheme with an employer contribution of 10% of workers’ pay.

Hugh Nolan, president of the Society of Pension Professionals and director of Spence & Partners, said this replacement DC arrangement “still compares favourably to the typical scheme offered to employees in many other industries across the UK”.

“A decent pension scheme with sustainable employment does seem like a better outcome for members than a fantastic pension scheme that leaves them jobless,” he said. “Having negotiated the improved offer, I think the unions are doing the right thing recommending this deal to their members.”

Negotiations between BSPS, the Pensions Regulator, and the PPF are ongoing.

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