The agreement between The Pensions Regulator and Tata Steel of a Regulated Apportionment Arrangement for the British Steel Pension Scheme has led to calls for a rule change.
Cardano chief executive of investment and risk specialist Kerrin Rosenberg said the Tata Steel experience has made it clear that the normal PPF route won’t always lead to the best outcome for trustees and pension scheme members.
“RAAs are intended as an extraordinary measure and have rarely been invoked. But now it seems that when a significant pension scheme teeters on the brink of falling into the PPF’s custody, 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.”
Rosenberg believes 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.”
Royal London director of policy Steve Webb believes that the deal represents a “good balance” between trying to save steel jobs and trying to protect members’ pensions. However, he said that over the course of the “saga” some much more acceptable offers were 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. 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 Pension Protection Fund".
In addition, Lincoln Pensions managing director Richard Farr said: “Following landmark cases concerning Kodak and Halcrow this outcome comes as no surprise and signifies another reality check for zombie companies.
“The key question is how much deficit will be transferred into the new scheme? 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.”
In a joint statement, unions Community, Unite and GMB said they welcomed the RAA, which includes a commitment that Tata will stand behind a new scheme with reduced annual increases.
“For over a year our members have feared for their security in retirement, and this announcement helps to bring that uncertainty to an end. We fought to ensure that our members can choose whether they want to transfer to a new modified scheme, underpinned by Tata, or to remain in the BSPS and therefore receive PPF compensation.
“Now that this choice is being delivered, the company and the trustees must step up to provide the necessary information and guidance to enable every member to make an informed decision in their best interests. Our members have been extremely disappointed at the unacceptable lack of communication in recent months, and this has to change immediately. The company and the trustees must remember they are dealing with people’s long term future, their life savings, and their family’s financial security; it is vital members are given all the support that they need.”