It looks like future Tata Steel pensioners will likely face a cut to their payouts regardless of what happens to the struggling steel business.
Members of the underfunded scheme are facing two options:
- Move from being pegged to the retail price index (RPI) to the consumer price index (CPI), which is typically 1% lower than RPI, and face slower growth of their pension pots.
- See the scheme fall into the arms of the state-backed “pensions lifeboat,” which recently took on BHS’ scheme. This option would mean future retirees receive just 90% of their promised payouts.
Both are disappointing for the 50,000 British Steel workers who have not yet retired. In total, there are 130,000 members of the scheme, according to the Times, but it is unlikely that those already retired will be affected. Under the PPF scheme, existing pensions continue to receive their full pension allowances.
The government appears to be moving towards the first option. Indian conglomerate Tata put its whole UK steel business up for sale in March, saying it would close it if a buyer could not be found. Would-be buyers have been put off by the expensive pension scheme. The £15 billion ($21.9 billion) plan has an estimated funding deficit of £485 million.
Rather than simply see it fold and go into the Pension Protection Fund (PPF), Business Secretary Sajid Javid has been trying to negotiate a softer settlement and is currently considering the shift from CPI to RPI if Tata promises to kick in an extra few million for the deficit. This solution would ultimately be better for pensioners. Although they would face lower payments, they would not be as bad as the PPF’s 10% haircut.
The only problem is that Javid’s plan is currently illegal.
In order to switch from CPI to RPI he would have to change the 1995 Pensions Act and critics are saying this could open a Pandora’s Box of other schemes who would then want to make the same change to lessen their liabilities.
Jon Hatchett, partner and head of corporate consulting at Hymans Robertson, told the Times:
Any company with a substantial deficit and pension increases currently tied to RPI might want to do this. The risk is that this opens the door to other companies. Across the whole of the UK we could be talking about £200 billion [cost of downgrading from CPI ot RPI].
Former Pensions Minister Steve Webb warned in his submission to Parliament on the BHS inquiry that there are hundreds of “zombie” schemes across the UK like BHS and Tata Steel.
These schemes are in deficit but low interest rates and a difficult business environment means the deficit is growing faster than they can invest in the schemes, which are drifting towards the PPF.
Tom McPhail, from stockbroker Hargreaves Lansdown, told the Times that the Tata Steel pensions move “could rip a hole in one of the most fundamental principles of pension provision. It is well established that pension benefits, once granted, cannot be taken away.” It’s unclear whether the plans being considered would affect existing pensioners.
However, Webb was more sanguine on the plan. Webb, who was Pensions Minister from 2010 to 2015, told BI earlier this month: “As long as its prospective, depending on future service, they’d probably get away with it I think. If there’s any element of retrospective then you’d have to change primary registration and you’d have EU human rights legislation to think about.”
Webb also told BI that, from the government’s perspective, switching from CPI to RPI could actually be a “win-win”. He said:”[Tata] doesn’t look as badly underfunded [as some schemes]. From what one can gather, it’s not a million miles away from PPF levels. That’s why I think there’s this interest in saying if they could get Tata to put some money in, maybe do something on the liabilities side with talk about CPI and all the rest of it.
“Some package that could enable the members to get better than PPF benefits and potentially keep their jobs too. You can see why that looks a bit like a win-win from a place where you wouldn’t want to start.”
The Times quotes the Department of Work and Pensions as saying: “We are not… considering extending the proposal beyond the BSPS [British Steel Pensions Scheme] as a specific scheme.”