Last week's agreement on a regulated apportionment arrangement (RAA) to split Tata Steel UK (TSUK) from its defined benefit (SB) pension fund fails to answer fundamental questions.
After months of intense negotiations, The Pensions Regulator (TPR) and Pension Protection Fund (PPF) have given the green light to terms of the deal which were first announced by the sponsor in May.
This includes TSUK paying £550m into the 130,000-member scheme, and a 33% equity stake in the company. Also, members will have the option to joining a proposed new scheme on reduced benefits, sponsored by TSUK, or enter the PPF.
This is expected to clear the way for Tata Steel to merge its European steel business with German firm ThyssenKrupp. An RAA became the most viable option for British Steel after the government shelved controversial plans to change pensions law to help the scheme.
Royal London director of policy Steve Webb, who was an outspoken critic of such changes to pensions law, welcomed today's announcement:
"This deal represents a good balance between trying to save steel jobs and trying to protect members' pensions. Over the course of this saga some much more unacceptable options have been considered. One would have been to change pension law just for the benefit of this scheme. Another would have been to create a new 'headless' British Steel Pension Scheme without a sponsoring employer. It is good that both of these have been rejected."
1) What qualifying conditions need to be met before Tata Steel will establish the new scheme?
2) What level of benefits will the proposed new scheme provide?
3) What kind of ongoing support will TSUK provide to the proposed new scheme?
4) How much of the deficit will be transferred into the new scheme?
5) What will happen to the 33% equity stake if the merger with Thyssenkrupp goes ahead, and will the stake ultimately be held by the PPF?
There are many uncertainties about parts of the deal, which is still subject to formal approval by the regulator in 28 days' time, notably the benefits structure for the new DB scheme which will be supported by TSUK.
Statements from stakeholders have only highlighted that benefits would be better than PPF compensation for most members - because around 6,000 high/low members may be better off in the lifeboat fund.
However, Punter Southall principal Martin Hunter said there are some clues from the statement on BSPS's website, which states that "details of the modified benefits were outlined in the trustee's letter to members of 26 May 2016." He said this suggests cuts to pension increases will be severe for some members, because that letter proposed reducing pension increases payable to members in payment to statutory minimum levels. For pension accrued before 5 April 1997, and in over the guaranteed minimum pension, there is no legal requirement to pay increases.
A 60-year-old member with all their service pre-1997 could lose around 40% of their pension, he estimated.
"The reductions to pension increases would mean that most current pensioners would only be marginally better off than if they received PPF compensation," he said. "However, the increases would be substantially less than those currently promised in the BSPS, as pensions currently increase with the Retail Prices Index (RPI).
"Over the long term RPI is currently expected to be around 3.5% per annum. While the exact impact for an individual will depend on their age, how long they live, and when they built up their pension, a 60-year-old member with all their service before 1997 would be losing around 40% of the value of their pension as a result of not receiving RPI inflation increases."
Some experts have speculated that the benefits structure of the new scheme will not be too dissimilar to what was introduced for British Home Stores.
There is also uncertainty over what will happen to the 33% equity stake which the new scheme will hold in TSUK after the planned merger with Thyssenkrupp.
Hunter said he expects the stake will ultimately be held by the PPF, rather than transferring to the new pension scheme, although this has not been confirmed.
"What will the PPF's interest in the new joint venture be, and will Thyssenkrupp be happy with the PPF having a minority interest?"
Other answered questions include what qualifying conditions must be satisfied before TSUK will agree to establish the new scheme - which appear to relate to the funding level and size of the new scheme - and what ongoing support TSUK will provide.
Given in most RAA deals the link between the sponsor and scheme is broken, it is unusual here that TSUK will support the new scheme. The level of support available in future may depend on the structure of the expected joint venture with Thyssenkrupp, said Hunter.
Another question is how much deficit will be transferred into the new scheme? Lincoln Pensions managing director Richard Farr said: "Only this will inform the market on how much risk was taken off the table and how much the new scheme members are still running."
Once the RAA is formally approved in 28 days' time, and more details emerge on the benefits structure of the new DB scheme, there will be a significant member communications exercise. Explaining to members the difference between the option of joining the scheme with lower benefits, or remaining in BSPS and facing cuts through the PPF compensation cap, will be challenging.
Royal London's Webb said: "It is important that scheme members receive clear information about the options now open to them and are given the advice and guidance that they need to make the choice as to whether to join the new pension scheme or remain in the existing scheme and eventually have benefits paid by the PPF."
Calls for rule changes
On a wider level, some believe the current rules need to change to reflect that the normal PPF route will not always lead to the best outcome for trustees and members.
While RAAs have rarely been invoked with just 27 having been agreed previously, Cardano chief executive of investment and risk specialist Kerrin Rosenberg said it now seems when a significant scheme is on the brink of falling into the PPF, an RAA process "is the solution".
"What has historically been an exception to the rule is now becoming more common than the rule itself. Surely that is a clear sign that the rules need to change. Pension funds which are very unlikely to meet their promises need another option beyond insolvency.
"A more robust system would allow stressed pension funds to restructure and separate from sponsors who are unable to afford their costs any longer. What this delivers is a more realistic promise to scheme members, without the destruction of value that comes with the current PPF route.
"If stressed pension funds were allowed to restructure in a more transparent way, a pension fund equivalent of Chapter 11, risk could be better shared between the company, the members and the PPF. Companies could be freed from pension obligations they simply cannot afford and members could get a better deal than entering the PPF."
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Aviva Life & Pensions has concluded an £875m buy-in with its own staff pension scheme, following on from a similar transaction last year.
Nearly every trustee is confident of the next stage in their scheme’s strategy, despite almost an equal number being forced to consider replacing plans within the prior 12 months, according to research by Barnett Waddingham.
Companies could be overstating their pension liabilities by up to £60bn due to their life expectancy assumptions, according to XPS Pensions Group.
Just Group has completed a £74m pensioner buy-in with the UK pension scheme of a US-listed engineering business.