The regulator and lifeboat fund have agreed plans to sever the £15bn British Steel Pension Scheme from Tata Steel UK after months of negotiations with the trustee and sponsor.
The terms of the proposed regulated apportionment arrangement (RAA) include £550m to be paid into the 130,000-member scheme by Tata Steel, with the pension fund getting a 33% equity stake in the company, and giving members the option to joining a new scheme on reduced benefits, sponsored by TSUK, or enter the Pension Protection Fund (PPF).
This will clear the way for Tata Steel to merge its European steel business with German firm ThyssenKrupp, after the pension scheme had been seen as a barrier to the corporate deal.
However, details of the new scheme, which is expected to be created, were not revealed in The Pensions Regulator's (TPR) announcement.
While Tata Steel's link to the defined benefit (DB) scheme will be severed, under the terms of the deal it will support the new scheme. This is different to the RAA deal agreed for BHS earlier this year whereby the sponsor's link to the scheme was severed.
Formal approval for the RAA is expected to be granted by TPR in 28 days' time, provided the decision is not referred to the Upper Tribunal by any of the parties which are directly affected by this decision. As neither the trustee nor Tata Steel intend to make such a referral, the RAA is expected to take effect on or about 11 September 2017.
The watchdog only granted clearance after ensuring it met strict criteria designed to stop employers abusing the RAA mechanism. This included that the business would have become insolvent within the next 12 months if the RAA had not taken place.
Such deals are still relatively rare, with only around 27 ever having been agreed, with the most recent RAA agreed for Hoover's scheme in May. An RAA became a viable option for British Steel after the government shelved controversial plans to change pensions law to help the scheme.
TPR chief executive Lesley Titcomb said in a statement: "We do not agree to these types of arrangements lightly but after several months of robust negotiations in this case, we believe that it is the best possible outcome for everyone involved in what is a very difficult situation.
"TPR is willing to work closely and constructively with employers who face real challenges in meeting their pension obligations due to difficult trading conditions. Our focus will always be on protecting members and the PPF. We have worked closely with the scheme trustees and the Pension Protection Fund to maximise the value received by the scheme.
"This proposal brings greater certainty for pension scheme members and unlocks the possibility of restructuring the company, which in turn could lead to preserving jobs.
"We are pleased that the employer has also agreed to sponsor a new scheme which has the potential to deliver higher benefits than PPF levels."
A PPF spokesperson added: "Members of the British Steel Pension Scheme will have seen a lot of speculation about the future of their pensions, so we want to reassure them the PPF is there to protect them throughout this process. The trustees will be providing them with lots of valuable information about their future options. We'd encourage members to consider the details and their position carefully and decide whether the new scheme or the PPF is the better option for them."
BSPS trustee chairman Allan Johnston said the trusst were pleased that Tata Steel UK has agreed to sponsor the new scheme, subject to qualifying conditions.
"Although the PPF is an important safeguard for pension schemes generally, the trustees believe that the BSPS has sufficient assets to fund benefits in the new scheme that will be better than PPF compensation for most members, and to do so on a low-risk basis sustainably into the future.
"We are satisfied that separation of the BSPS from Tata Steel is necessary to avoid an insolvency of Tata Steel UK Limited. The terms agreed for separation will secure a better outcome for the BSPS and its members than TSUK insolvency. It is the best outcome that could be achieved in the circumstances."
Tata Steel's group executive director Koushik Chatterjee welcomed today's agreement on the RAA. "The RAA process has been a long and detailed one, and I would like to thank the Pensions Regulator, Pension Protection Fund, the Trustee of the British Steel Pension Scheme, its members, the unions and employees - indeed, all our stakeholders, including the Governments of the UK and Wales, for their constructive engagement through the process.
"Considering the continued challenges in the global steel industry as well as the uncertain global politico-economic environment, the RAA presents the best possible structural outcome for the members of the British Steel Pension Scheme and for the Tata Steel UK business.
"The RAA is one important milestone in Tata Steel UK's journey towards a sustainable and enduring future, with pension obligations, whose risk profile would be consistent with the underlying business. The net financial impact of the RAA including the payment of the agreed amount would be reflected in the Q2 FY'18 financials for the company."
In February steelworkers accepted Tata's proposal to close the BSPS to new members and replace with a defined contribution (DC) scheme.
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