Financier Edmund Truell believes he can protect British Steel benefits. Michael Klimes examines the details
- Any solution for the BSPS will cost money
- The question is who pays
- Truell says he can safeguard member benefits
Many defined benefit (DB) schemes have a funding problem. There is simply not enough money to pay pension promises.
The £13.3bn British Steel Pension Scheme (BSPS) exemplifies the problem, with an estimated deficit of £700m on technical provisions.
It has 130,000 members, only 15,000 are active and any sponsor has to maintain the scheme. The government's consultation about what to do can be seen as an exercise in asking who should foot the bill. Its plans to rescue BSPS by reducing members' benefits are controversial.
Among the four options it has consulted on, two evoke concern. One seeks to reduce benefits by lowering annual increases while the second involves a potential bulk transfer of members to a new scheme with a reduced benefit structure.
Desperate times call for desperate measures and Disruptive Capital Finance chairman, Edmund Truell (pictured above), believes he has the answer. In his consultation response, he lays out a strategy for BSPS to get to buyout in 10-15 years. The Truell Charitable Foundation (TCF) and Disruptive Capital Finance would handle the project.
At the heart of Truell's idea is doing a unique hedge with BSPS. He insists the only way for BSPS to become sustainable is through a non-collateralised hedge to confront longevity and inflation risks.
"Because BSPS is underfunded it does not have enough money to be able to take the risk off the table," he says.
The pillars of the plan are the government provides an inflation hedge against the retail price index (RPI) exceeding 2% a year; a longevity hedge that goes further than the current scheme specific assumptions. Tata Steel UK would provide a contribution as well as a possible contribution from a future operator of the steel assets. Current fund managers would be replaced with buyout specialists.
Trustees, The Pensions Regulator and other stakeholders would have to provide advanced consent of the project.
Truell hopes to raise £1bn to fund the initiative. TCF would provide £200m, Tata Steel UK would be expected to contribute "hundreds of millions" and the remainder will come from other business partners. If it all goes to plan, everyone should get their money back but there are risks for taxpayers if things don't go as intended.
Truell says: "Someone somewhere has to bear the risk and cost of these pension promises, many of which have been layered on by politicians."
According to Truell, since the law states that benefits cannot be cut and many trustees do not want to chop benefits, a more radical approach is needed. He believes the answer lies in how DB schemes and broader financial players hedge against risk.
"One reason why the hedging market does not work is because the banks do not want to tie up a lot of money with dead money," he says. "The banks have to give the pension fund collateral in the same way pension funds have to give the banks collateral. You have billions of pounds tied up doing bugger all to provide safety for the hedge," he argues.
He believes a commitment from the government to remove inflation and longevity risk is an insurance policy, not a subsidy from the taxpayer. "The subtlety of what I am saying is actually guys [the government] 'I just want to hedge but I don't want to put up collateral and I don't demand collateral'. It [Truell's plan] has a very good risk-adjusted return and one that over time means the British Steel pension fund will be able to pay its pensions."
Money used for the hedge can be put into better investments such as infrastructure. "If I have insurance I can manage my pension fund in a more long-term way and get this pension fund to solvency but I need to take risk off the table first. I can take that pot of risk and put it to work in the assets."
Royal London policy director Steve Webb does not think Truell's point about insurance is credible. He asks why the government would ask the taxpayers to stand behind longevity and inflation hedges for one industry over another. There is also the danger the government will have to pay up if the hedges against inflation and longevity are breached under Truell's plan.
"Expecting a government to pick one pension scheme and to provide a longevity hedge and secondly an inflation hedge is not realistic. He [Truell] is saying 'guess what, we can do all of this relatively cheaply if somebody else pays for the more expensive elements'.
"If I was a car worker with an underfunded pension I would be outraged – my taxes, which might not be enough to keep my pension out of the PPF, may be used to stop someone else going in. It is also unrealistic to think you would get any money from the new steel operator, who will have no incentive at all to chip in."
When PP asked the trustees of BSPS about Truell's ideas, they said: "The trustee have received a written proposal from Mr Truell and have no comment to make."
Truell's plan is ambitious but there are huge hurdles. Firstly it is difficult to persuade all stakeholders to agree with Truell's point of view.
"I have got to move from a position where everyone is interested to one where everybody approves or agrees," he says. "I am not the sponsor, I don't own the company. I am looking to buy the company to solve that problem and then go to people and ask do you agree with this."
But the most salient issue is who bears the risk of potentially paying a massive sum to keep BSPS out of the PPF: the government or members?
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