The £15bn British Steel Pension Scheme (BSPS) was thrown into turmoil in the spring of 2016 when Tata Steel, BSPS’s sponsor, decided to exit the UK market after years of losses and a growing pension deficit which stood at £700m. Global steel prices had crashed as well due to oversupply from Chinese steelmakers. David Cameron, UK prime minister at that time, along with his cabinet, had persuaded the company’s management to go back on their decision to quit the UK. In order to prevent Tata Steel UK from becoming insolvent, the BSPS was restructured. Members were given the choice to join a new scheme, namely BSPS 2, sponsored by Tata Steel UK, transfer their pension pots to an investment fund, or switch to the Pension Protection Fund (PPF). However, none of these options had the generous benefits of the original BSPS.
Tata Withdraws Support for BSPS
With the Pension Protection Fund (PPF), the government’s pensions lifeboat, there are lower annual increases for members already drawing their pensions. Furthermore, members are expected to see a reduction of at least 10% from their pension benefits than was previously expected. Following feedback from the regulator, Tata agreed to stop supporting the BSPS and start sponsoring a new scheme, BSPS2. This scheme employs a rarely used mechanism called a regulated apportionment arrangement (RAA), which was approved in March 2018 by regulators and allows sponsors having financial constraints to get rid of their defined benefit pension liabilities.
With this new scheme, BSPS 2, there will be increases in future payouts pegged to a lower measure of inflation. There will be lower annual increases in future payouts for pensioners which will reduce the exposure for the company and enhance its funding position. Pensioners’ benefits index has changed from the retail prices index (RPI) to the generally lower consumer prices index (CPI), thus slashing Tata Steel’s pension liabilities by £1.5bn. Although this has resulted in future pension increases being reduced from their current levels, it provides better benefits than the PPF.
Members willing to transfer their pension to an investment fund were the target of dubious advisers. These advisors urged them to abandon their defined benefit pensions and invest in complex products for which they had little or no understanding. Consequently, lots of BSPS members were hoodwinked by advisers who made them sign up for ongoing adviser fees, unsuitable funds with punitive exit fees, and very high investment risk. According to steelworkers, some advisers recommended them to transfer their benefits, valued from £300,000 to £500,000, into riskier funds without even determining their risk aversion.
In light of this critical situation, the FCA and the pension regulator were vehemently criticised for not acting early to protect BSPS members from unsuitable advice. Subsequently, the FCA probed pension transfers and found a lot of cases where scheme members were given unsuitable advice, accounting for 49% of transfer advice. Hence, the FCA barred some firms from giving pension transfer advice.
New pensions arrangements have been enacted following the long negotiations between Tata Steel UK, the trustees of the BSPS and UK regulators. This has resulted in the scheme for UK steelworker to be decoupled from the British Steel Pension Scheme (BSPS) sponsor, Tata Steel UK. Should these new pension arrangements have a successful impact, it could spell the end of the crisis in the UK steel industry. It could also pave the way for Tata to merge its European steelmaking operations with those of ThyssenKrupp as talks were announced last summer.