It’s zombie versus lifeboat for British Steel Pension Scheme. Since Tata Steel announced plans to sell or close all its UK plants a year ago, the future of Britain’s steel industry has been under threat. But after improved profits, offers of government help and disposals of some businesses, the Indian parent company recently announced a change of heart, offering £1bn of investment over five years into its UK business. The parent group also said it would pursue a joint venture of its overall European operations with ThyssenKrupp, the German industrial company.
This offer was conditional on closing the £15bn British Steel Pension Scheme to existing members, and moving them to a less generous defined contribution pension. Although employees, mainly in Port Talbot, South Wales, voted for this “jobs before pensions” deal, they had little choice. They were moved to the new pension this month.
However, the £1bn investment depends not only on closing the pension scheme, but also on completely separating it from Tata Steel, so the company has no further obligation to fund deficits. This separation is technically possible, but extremely difficult. Regulations are expressly designed to prevent companies from walking away from their pension obligations.
The UK Pensions Regulator can approve a rarely used mechanism allowing Tata Steel UK to offload its pension scheme into the Pension Protection Fund, the lifeboat for capsized schemes. But this mechanism, known as a regulated apportionment arrangement, can only be used under strict conditions. Tata Steel UK would have to prove that it faced inevitable insolvency, and that the pension scheme was being treated fairly versus other creditors. More importantly, the regulator can only approve a deal if it meant the pension scheme got more cash than if Tata Steel UK simply went bust, and the pension scheme got its share of assets as an unsecured creditor, and by calling any guarantees from group companies.
This is the rub: Tata Steel’s profitable Dutch company has issued a guarantee for the British Steel Pension Scheme. The terms have not been disclosed, but the FT reported it could be worth 30 per cent of the Dutch company’s net assets, or around £500m. The Economic Times of India last week reported that Tata Steel India is trying to agree a £520m payment allowing the British Steel Pension Scheme to enter the PPF, but neither the PPF nor the regulator would comment on the current negotiations. As though this was not difficult enough, the scheme’s trustees are trying to pull off something even more difficult.
They want to keep the pension scheme out of the PPF to become an independent “zombie scheme”, with no sponsoring employer. The trustees argue the pension scheme would be well funded once Tata Steel has made a large cash payment into it, and that by reducing member benefits it can be “self-sufficient” and pay all pensions. But they have not made the case that this would be better for the 130,000 scheme members. All 70,000 members already drawing a pension, and many of those wanting to take early retirement, would be no better off, and around 6,000 would be worse off than going into the PPF. The PPF’s new rules for zombie schemes — cleverly designed to minimise its risk — mean the British Steel Pension Scheme would have to start with a surplus against the assets needed to pay the PPF level of benefits.
In December 2015 the pension scheme had a £1.5bn PPF deficit, which will be at least that today. For the pension fund to qualify as a zombie scheme, Tata Steel would have to inject at least £1.5bn cash, and possibly a lot more, depending on the cushion the PPF requires. As the first zombie deal under the new rules, Sir Philip Green has just paid £363m into the BHS pension scheme, which was much smaller than the £15bn British Steel Pension Scheme. The zombie-scheme deal is a dangerous distraction, and may prevent the British Steel Pension Scheme from entering the PPF. It could even threaten the proposed joint venture with ThyssenKrupp.