Tata Steelworkers' Pensions At Risk In Sale

It (Other OTC: ITGL - news) is, perhaps, the least-discussed element of the steel crisis - drowned out by all the noise concerning Chinese dumping, business rates and green energy levies.

And yet the pension liabilities attached to Tata’s UK steel business are likely to be central in any discussions held with would-be buyers of those assets. They also have the potential to capsize any deal.

There are 130,000 members in the British Steel pension scheme, of whom 85,000 are currently drawing a pension, in most cases dating back to the days of British Steel, the once state-owned business that in 1999 merged with the Dutch company Hoogovens to form Corus, which Tata bought eight years later.

A further 30,000 members of the scheme are what are known as “deferred” members - in other words, they no longer work for Tata Steel UK or any of its predecessors, but are not yet in a position to draw their pension.

The remaining 15,000 or so are existing employees of Tata Steel UK.

The pension scheme is a big one - it has assets of something like £16bn and a deficit, at the time of the last valuation two years ago, of £485m.

That is already one of the largest deficits of any UK pension scheme and is likely to have increased during the last two years due to a combination of factors, including revised assessments of the life expectancy of current and former steel workers, along with movements in bond markets - the latter of which will have served to have increased the deficit.

Tata has committed to injecting a further £125m during the next two years - £60m in 2017 and £65m in 2018 - but that is not going to be enough.

There is an expectation that this deficit will need to be plugged in the event of a sale of the business.

None of the companies being touted as potential buyers of Tata Steel UK will want to take on responsibility either for filling the deficit itself or for any other liabilities pertaining to the retirement savings of former steel workers.

So a solution will need to be found for the pension scheme.

One option would be for the pensions regulator to insist that Tata fill in the deficit itself.

But that would be unreasonable in the extreme, since the company has not only been taking steps to plug the gap, but also because it has borne the £1m-a-day losses incurred by the steel business during the last few years.

It could even prompt Tata into retaliating by tipping the UK business into administration.

A second solution would be for the scheme to be passed to the Pension Protection Fund.

This is a lifeboat paid for by compulsory levies on every other pension scheme in the land and by the recovery of assets from insolvent employers whose schemes end up being rescued by the PPF (Shenzhen: 300258.SZ - news) .

The PPF is, for example, currently in talks about taking on the liabilities of the two pension schemes of the retailer BHS.

One of the drawbacks with this solution, though, is that current employees and deferred members of the scheme would see their retirement benefits cut.

A third possible solution that has been mooted would be for the Government to take on the scheme, as it did in 2012 with the Royal Mail (LSE: RMG.L - news) pension scheme, prior to the company’s privatisation.

This, however, is likely to be a non-starter because it would fall foul of EU state aid rules.

In addition, the Royal Mail precedent is not an apt one, since the business was state-owned at the time its pension scheme was taken on by taxpayers, while the company also demonstrably had a viable future, something that cannot be said of Tata Steel UK.

A fourth option would be for Tata, as the current owner, to do what is known as a ‘bulk annuity’ deal, where an insurance company, for a fee, agrees to take on the assets of a company’s pension scheme and assumes the risk of meeting the promises made to retirees.

Many UK companies have done this over the last five years or so, including household names such as Tate & Lyle (LSE: TATE.L - news) , ICI, Philips UK, EMI and Total (Euronext: FP.NX - news) .

This would be an attractive solution but, given the sheer size of the British Steel pension scheme, many insurers might be deterred.

So some kind of deal involving the Pension Protection Fund looks the likeliest option.

But rest assured that some kind of deal securing the future of the British Steel pension scheme and its promises to thousands of current and former steel workers is going to have to be struck if any kind of rescue takes place.