British Steel trustee: Compelling evidence proves we can survive outside PPF
The British Steel Pension Scheme (BSPS) trustee has shown the government "compelling evidence", arguing it can pay modified benefits indefinitely on a low risk basis outside the lifeboat fund.
The comments from trustee board chairman Allan Johnston came as the government is considering its response to the consultation on controversial changes to the BSPS to avoid it having to go into the Pension Protection Fund (PPF).
The trustee wants to reduce liabilities by switching annual pension increases from the Retail Prices Index to statutory minimum increases, which is mostly the Consumer Prices Index. Tata Steel can only sell its UK business if the pension scheme is restructured to lower the deficit.
This has been met with scepticism because it would involve legislative changes which could create a loophole. Also, there are concerns it could put the sustainability of the PPF at risk as the scheme could still end up in the lifeboat fund regardless, and potentially in a worse position than if it went in sooner.
However, Johnston said the trustee board and its advisers have handed "persuasive" evidence to the government showing the scheme can be self-sufficient outside the PPF.
He argued the scheme is in a better position than most other DB schemes, which have taken a big hit from the record falls in gilt yields in recent weeks.
The trustee's information assumes the scheme moves to a long-term, low-risk investment policy designed to match cash inflows to benefit outflows.
Even allowing for the recent interest rate falls, the trustee believes it would still have a very significant financial buffer available to protect against residual risks. It argues those risks would be much lower than risks being run by most other schemes, and lower than those of the PPF.
This means that, even if these risks were to materialise, the net result for the PPF should still be better than if BSPS went into the PPF now. Also, if the risks do not materialise, the buffer could be used to reinstate future pension increases, the trustee added.
Johnston said: "Our investment strategy has meant that the scheme's funding position has not been affected by recent falls in gilt yields in the same way as many other UK pension schemes and we remain confident of the scheme's ability to provide modified benefits as proposed on a self-sufficient basis.
"The scheme's success in managing investment risk has been recognised by the external analyst State Street, which provides benchmarking information to many large UK pension schemes. Over the ten-year period to 31 March 2016, the scheme recorded the best performance relative to other large funds in the survey on both absolute and risk adjusted bases."
At the last funding update on 31 March 2015, the trustee reported a deficit on an on-going basis of £485m under technical provisions. The scheme's actuary found the deficit had fallen to £300m as of 31 March 2016, however.
"The improvement in the scheme's funding position between March 2015 and March 2016 is due in part to favourable demographic experience since the last full valuation and also to the scheme's continued strong investment performance," Johnston added.
The scheme's assets have reached an all-time high of over £15bn, though record low yields will have increased its liabilities.
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