The Pension Protection Fund has criticised a radical government proposal to cut benefits for members of the British Steel Pension Scheme, saying it would not want to insure a scheme that did not have a proper sponsoring employer.
The PPF, in its public consultation document, stated that under the government proposals the British Steel Pension Scheme would almost certainly be separated from its sponsoring employer, Tata Steel.
According to the PPF, this separation would leave the scheme highly vulnerable to market volatility, and make the scheme an even more likely candidate to fall into the PPF than it already is.
In May, the government proposed reducing annual member benefit increases, putting them in line with the consumer price index rather than the usually higher retail price index.
The proposal was part of a push to find a buyer for the loss-making Tata Steel.
The PPF, which acts as the collective insurance policy of the UK’s company-sponsored defined benefit schemes, pointed out that, in the government’s own words, it was “highly unlikely that a purchaser would be willing to take on the pension scheme as part of the deal”.
It therefore predicted the new, restructured pension scheme’s sponsor would be a “shell company” with little or no financial value as a sponsor.
This would, by default, make the PPF the scheme’s sole insurance policy, a spokesman for the PPF argued.
“With no genuine employer to act as a buffer and provide additional contributions when needed, the risk of the scheme’s investment strategy failing would either fall on the scheme members or – if it was decided to maintain PPF eligibility – be directly underwritten by the PPF.
“Even using a ‘low risk’ investment strategy the possibility of a substantive deterioration in funding levels remains,” the spokesman for the PPF said.
It urged the government to “seriously consider making any such scheme ineligible for PPF protection”.
“If PPF eligibility is retained wider legislation may be needed to allow the risk based levy to be calculated appropriately and to provide effective protection for PPF levy payers (including appropriate controls over investment strategy, and triggers for PPF entry to prevent a significant deficit accumulating),” the spokesman said.
Darren Cooke, a financial adviser at Red Circle Financial Planning, agreed that a defined benefit scheme without a proper sponsoring employer would be highly vulnerable to failure.
“If it doesn’t have a proper sponsor and it is underfunded, sooner of later it’s got to run out of money, sooner or later it’s got to fall into the PPF,” he said.
As a financial planner who offers DB transfers, Mr Cooke said a scheme without either a proper sponsor or the backing of the PPF may well be a case for transfer.
However, he added he would “have to have a really good look at the scheme” before advising his client to transfer out.
He said the government’s proposal to reduce benefits was “a recipe for disaster” because it would set a precedent for other schemes. The PPF made the same point in its submission.