The trustee of one of Britain’s biggest defined benefit pension schemes has urged members to support cuts to their benefits, in a move that is likely to have ramifications for the entire sector.
In a letter to the British Steel Pension Scheme’s 130,000 members, trustee chairman Allan Johnston appealed to members to accept “modified benefits” to save the scheme’s sponsor, Tata Steel, and prevent the scheme falling into the Pension Protection Fund (PPF).
Mr Johnston said if the pension deficit remained at close to £500m, the loss-making Tata Steel would have no chance of finding a buyer, making failure inevitable.
Along with mass redundancies, Tata Steel’s collapse would result in the scheme falling into the PPF, in which case members would automatically see a 10 per cent reduction in benefits.
“In other words,” he said, “the trustee believes that it is better to use the scheme’s assets to provide modified benefits under the scheme than to hand them over to the PPF, so that members are paid PPF compensation.”
As of March 2016, the British Steel Pension Scheme had about £13.5bn of assets, making it the twelfth biggest scheme in the UK.
In a consultation released in May, the government proposed changing legislation to allow the British Steel Pension Scheme to link pension benefit increases to the consumer price index, rather than the usually higher retail price index, thus taking pressure off the scheme’s sponsor.
Mr Johnston supported this proposal.
If adopted, it would set a new precedent for the thousands of UK businesses with massively under-funded DB schemes.
The trustee’s announcement came a day after former BHS owner Sir Philip Green hinted during a parliamentary select committee hearing that he would push for a similar compromise for the members of the BHS pension scheme.
It also came ahead of a major parliamentary inquiry into the DB sector as a whole, to be led by work and pensions select committee chair MP Frank Field.
Announcing the inquiry in May, Mr Field said: “We should be under no illusions that British Steel is a special case.
“Eleven million people have private defined benefit pensions. More than 5,000 of the associated schemes are in deficit to the tune of £805bn, while the combined surpluses of other schemes is £4bn.”
The government’s consultation period over its proposals for the British Steel Pension Scheme ends next week, having been open for just a month.
Former pensions minister Steve Webb, now director of policy and external communications at Royal London, said the process had been rushed.
“Not only are they giving a month for consultation, but they’ll have the law written within weeks. Within a few months it’ll be done and dusted, and that sets alarm bells ringing,” he told FTAdviser.
“I don’t criticise anybody’s motives in all this. The attempt to save thousands of jobs is an admirable one.”
But Mr Webb added rushing pensions legislation was bound to have unforeseen consequences.