The Pension Protection Fund, London, has warned that two of the options proposed by the U.K. government to save the British Steel Pension Scheme, London, pose “significant risks for relatively limited gains.”
The government launched its comment paper last month, detailing four options that would help to secure the best outcome for members of the £13.3 billion ($19 billion) pension fund, which has a £700 million deficit. The pension fund's sponsoring employer is Tata Steel U.K., a subsidiary of Tata Steel Ltd. Tata launched a process to sell Tata Steel U.K. in April.
In its response to the paper, the PPF said that any solution to the BSPS situation must balance the outcomes for the pension fund's participants, with the interest of payers of the PPF levy.
The two options the PPF said would pose significant risks are enacting legislation to allow for a reduction in benefit levels of the pension fund, allowing it to run outside the PPF; and enabling a bulk transfer of participants in the pension fund, with an opt-out provision, to a new pension fund with a reduced benefit structure.
“Both options … pose significant risks for relatively limited gains and raise significant questions of equity between the treatment of BSPS and the PPF's members and levy payers, which could be tackled in different ways,” the PPF said. Reduced benefit levels for participants would “remove much of the distinction between the benefits members would receive in the existing scheme” or any new pension fund, “and the level of compensation they would receive from the PPF.”
The PPF said that while the majority of participants would receive about the same as they would under the PPF's auspices, a minority would be worse off.
And at the same time, since there would be no genuine sponsoring employer, the PPF's levy payers “would be directly underwriting the risk of the existing or new scheme's investment strategy failing.” Under this circumstance, the PPF said the government “should seriously consider making any such scheme ineligible for PPF protection.”
Of the remaining proposals, one would use existing regulatory mechanisms to separate the pension fund and the employer, with BSPS entering a PPF assessment period. This “provides a tried and tested route that would allow the emergence of a business free from pension liabilities whilst ensuring members receive at least PPF compensation levels,” the PPF said.
The last option would require Tata Steel U.K. to make payments to remove the deficit, which the PPF said has already been ruled out by the company.