The UK’s Pensions Regulator (TPR) has granted “initial approval” for a restructuring of the British Steel Pension Scheme (BSPS).

As first proposed in May, Tata Steel will pay £550m to the scheme as part of the deal, with BSPS also receiving a 33% equity stake in the business. Tata will sponsor a new scheme offering “modified” benefits, according to statements published today.

The regulator said the move would prevent the company becoming insolvent while also providing certainty for BSPS members.

The £14.7bn (€16.7bn) pension fund will be restructured through a regulated apportionment agreement (RAA), a measure used occasionally by UK authorities to spin off pension funds from their sponsoring employers.

Under the arrangement, a new scheme will be set up, with members given the option of transferring to this scheme or remaining with the existing BSPS, which will transfer to the Pension Protection Fund (PPF) at the end of March 2018.

The trustees of BSPS have maintained since the start of discussions last year that the scheme had sufficient assets, internal resources, and investment strategy to continue independently and provide benefits better than those paid by the PPF.

Law firm Travers Smith, which advised the trustees, said the new scheme would provide “modified benefits” with lower annual increases.

Tata Steel UK will be the sponsor of the new scheme, meaning it would still foot the bill for funding shortfalls

The RAA is expected to be approved on 11 September, subject to a 28-day waiting period.

Allan Johnston, chair of BSPS trustees, said: “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 than 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 Limited. The terms agreed for separation will secure a better outcome for the BSPS and its members than insolvency. It is the best outcome that could be achieved in the circumstances.” 

Lesley Titcomb, chief executive of TPR, said the agreement had come after “several months of robust negotiations”. She added that the restructuring could also lead to preserving jobs. Last year, the company agreed a funding deal to guarantee jobs and investment for the Port Talbot factory in Wales, but this was given the caveat of the company being able to reduce its obligations to the pension fund.

“This proposal brings greater certainty for pension scheme members and unlocks the possibility of restructuring the company, which in turn could lead to preserving jobs,” she added. “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.”

Following the discussions, TPR was satisfied that Tata Steel UK faced insolvency within 12 months without a restructuring of the scheme.

A spokesperson for the PPF said: “Members of the British Steel Pension scheme will have seen a lot of speculation about the future of their pensions, so we want to reassure them the PPF is there to protect them throughout this process.

“The trustees will be providing them with lots of valuable information about their future options. We’d encourage members to consider the details and their position carefully and decide whether the new scheme or the PPF is the better option for them.”

TPR said in its statement: “RAAs continue to be rare. If this RAA gains formal approval, it will only be the second that TPR has approved this year and the third in the last two years.”

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