Pensions  

What choices do BSPS members have?

What choices do BSPS members have?

The British Steel Pension Scheme (BSPS) is closing and its members need to decide what to do with their money by 22 December. It is shocking to learn that, so far, about 12,200 members have opted to transfer out and about 30,000 members have not yet made a decision. Good quality financial advice is needed.

Tata Steel UK is the sponsor of BSPS and was in danger of becoming insolvent if it continued to support the pension scheme. In most cases where a pension scheme’s sponsor has become insolvent, or is likely to, the pension scheme assets and liabilities roll into the Pension Protection Fund (PPF). If this happens, pension scheme members do not have to make any decisions about what to do with their money as there are no options. However, in the case of BSPS, the trustees thought that the scheme was large enough (at £15bn), and robust enough, to separate from Tata Steel UK and to continue as BSPS II.

The trustees persuaded the regulators of this course with the support of three fundamental agreements with Tata Steel UK: that they would continue as the legal sponsor of the new scheme (BSPS II), that they agreed to pay £550m to BSPS II, and that they gave BSPS II a 33 per cent stake of their own business.

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As a result, scheme members have a choice about what to do with their money: stay with the original scheme (BSPS) and, by default, roll into the PPF, move to the new pensions scheme (BSPS II), or— for those who are younger than 64 and have not started taking their pension — to transfer out to a different pension arrangement. Of the 130,000 members of the scheme, 88,000 are already taking their pension and 43,000 are deferred members.

According to the trustees, BSPS II is better value than the PPF for the majority of scheme members who are already taking a pension, including those on a spouse’s pension or on an incapacity pension. The table in Figure 1 compares the PPF and BSPS II to the current scheme (BSPS). There are a few areas where the PPF option is financially better for an individual who has not yet retired.

PPF

BSPS II

Benefits lower for some members

Benefits the same

Annual increases lower

Annual increases lower but will be the same as or higher than in PPF

Spouse's pension is 50% and is calculated after tax-free cash taken

Spouse's pension is 50% and is calculated before tax-free cash taken (more generous than PPF)

Can be more generous with tax-free cash

 

Can be more generous if retire early

 

Transferring out is an option open to some scheme members and is more complex. It involves members taking additional risk in exchange for potentially greater rewards and/or greater flexibility. The additional risks are around: future investment returns, life expectancy, inflation and dependants’ benefits.

The trustees have published the cash-equivalent transfer value (CETV) assumptions as a technical note on their website. Like-for-like, for members to obtain superior investment returns outside of the scheme would mean taking on more investment risk and/or investing in illiquid assets. Like-for-like, self-invested returns would need to also exceed all of the following: the reduction in CETV due to the funding insufficiency (the scheme’s assets fall short of its liabilities, and correspondingly lower CETVs are offered), the reduction due to initial charges, and reductions due to ongoing charges. They will be greater hurdles for those closer to retirement, where there is less time for funds to accumulate before drawdown.