The Department for Work and Pensions is considering introducing special legislation to allow the British Steel pension scheme, which Tata sponsors, to water down benefits to its 130,000 members without their consent.
Trustees of the scheme have pushed for the move, which they say is better than the alternative of it being transferred to the Pension Protection Fund, imposing deeper cuts to most members reports The Times
Under the proposal, instead of having their pensions uprated by the retail prices index each year, members would have them raised by the consumer prices index, which is typically 1 percentage point per year lower.
The department said that Tata was a special case, adding: “We are not . . . considering extending the proposal beyond the BSPS as a specific scheme.”
However, pension advisers said the concession, which will require changes to the 1995 Pensions Act, would be seized on by other employers with big pension deficits.
“Any company with a substantial deficit and pension increases currently tied to RPI might want to do this,” Jon Hatchett, partner and head of corporate consulting at Hymans Robertson, said. “The risk is that this opens the door to other companies.”
He said the impact of downgrading in inflation-proofing could be immense. “Across the whole of the UK we could be talking about £200 billion.”
While most private sector defined benefit schemes have been closed to new members, 11 million people are still owed valuable pension benefits.
Tom McPhail, of Hargreaves Lansdown, said the move “could rip a hole in one of the most fundamental principles of pension provision. It is well established that pension benefits, once granted, cannot be taken away”.
Joanne Segars, of the Pensions and Lifetime Savings Association, said: “While we recognise the role the pension scheme plays in this situation [the attempt to save Tata Steel], we also urge the government to be alert to the fact that their actions could affect not only the members of the British Steel scheme, but also millions of other savers in defined benefit schemes.”
The proposed pension switch is part of a plan to save Tata Steel UK and 11,000 jobs by making it more attractive to potential buyers. Experts have estimated that the move could wipe about £2.5 billion off the scheme’s £14 billion of liabilities.
The proposal was welcomed by the British Steel pension scheme and Tata. It would provide better retirement benefits for the majority of the 130,000 pension fund members than a move into the protection fund, Tata said.
Tor Farquhar, Tata’s human resources director, said: “This is an important step forward. This option, which is fully supported by the pension scheme’s trustees, provides a way for the scheme to continue to operate on a well-funded, low-risk basis indefinitely.”
The reduction in inflation-proofing would apply not just to pensions in payment, but also to so-called deferred members, former employees who have clocked up valuable benefits but have not yet retired.
As well as providing lower year-by-year inflation-proofing, the switch would be subject to a 2.5 per cent cap, leaving members vulnerable to big rises in inflation.
The 50,000 members of the British Steel scheme who are not yet retired would particularly benefit from not entering the protection fund because they would not be subject to the 10 per cent reduction in pensions it imposes, the department said.
Meeting the cost of the shortfall The shortfall in the British Steel pension scheme is £7.5 billion on a worst-case buyout basis, or £58,000 per member, the Department for Work and Pensions said.
It estimated the ongoing basis deficit, assuming a solvent employer would be willing to take on the scheme, at a more manageable £700 million, though this was still larger than the regularly quoted £485 million shortfall.
The buyout cost is the estimate of what would be required to persuade a private sector insurance company to take on all the assets and liabilities.
Even to get an insurer to provide benefits equivalent to those offered by the Pension Protection Fund would cost £1.5 billion, it said.
The scheme pays pensions to 84,000 former steel workers and has promised retirement incomes to 46,000 who have not yet retired.
Many were in some of the most deprived parts of Britain, where “even comparatively small reductions in income levels can have a disproportionate impact”, the department said.