Tata Steel has offered to pay “hundreds of millions” of pounds to its 130,000 member-strong pension scheme to release a guarantee the fund holds over its Dutch assets and smooth the way for a merger with ThyssenKrupp, its German rival.
“We are in meaningful negotiations with the company now,” said Allan Johnston, chairman of the scheme’s trustee board, in an interview. “We’ve had an improved offer for the release of the security package.”
The Indian group is restructuring its business following an announcement last spring that it wanted to exit the UK following years of losses. It wishes to detach its £15bn pension fund, which it says has become a significant financial drag.
The pension fund has a guarantee over Tata’s Ijmuiden plant in the Netherlands, which provides financial protection for the scheme by giving its trustees a right over the assets in certain circumstances. Tata wants to buy out these claims to facilitate a merger of its European business with that of ThyssenKrupp.
Tata Steel has warned regulators that the pension fund will sink its British steelmaking operations into insolvency, but is struggling to make the case after an upturn in the steel market. The pension scheme is well-funded, though it has only around 1 in 13 members still contributing and dwarfs the size of the operating business.
As part of a proposed rescue package agreed with trade unions last month, Tata agreed to keep both blast furnaces at the giant Port Talbot plant in south Wales running for at least five years, conditional upon its ability to detach the scheme.
Tata Steel wrote to the Pensions Regulator this month attempting to demonstrate that its UK subsidiary was close to insolvency, said Mr Johnston. This is a pre-requisite for obtaining a regulated apportionment arrangement, a rarely-used mechanism aimed at helping financially distressed companies by freeing them of retirement obligations.
“I have correspondence between the company and the regulator, and the regulator is saying ‘we haven’t proved yet that insolvency is inevitable, and it’s inevitable within the next 12 months’,” added Mr Johnston.
Following a rise in steel prices, an efficiency drive and hundreds of redundancies, Tata Steel UK is now understood to be making a small profit — a far cry from the £1m it was losing daily at one point. But the business requires large amounts of capital investment, raising doubts whether it can stand alone without financial support from its parent.
Under plans being drawn up, BSPS members will be asked to consent to increases in future payouts being pegged to a lower measure of inflation, with the scheme put in a special purpose vehicle holding a guarantee from Tata Steel. Those members not consenting would transfer by default into the PPF, the lifeboat for failed pensions that results in cuts of at least 10 per cent for members. But Mr Johnston said a change in regulations would be needed for this plan to succeed.
The Pensions regulator said: “We continue to have discussions with the employer and the trustees about the future of the British Steel Pension Scheme. There are still significant issues to be resolved and we will consider any proposals carefully in light of their impact upon the 130,000 pension scheme members and PPF levy payers.”
Tata Steel said a “structural solution” addressing the risks and volatilities of the pension scheme was needed to find a “solvent and sustainable future” for its UK business.
The company said it was working with the trustees, unions, regulators and government to achieve the “best outcome possible” for the scheme and its members.
It added: “Separation of the pension scheme from the business is an option which is currently under very serious consideration. We are still exploring all options.”
Thousands of steelworkers are expected to vote at the end of this month on the rescue package, which proposes replacing the BSPS with a less-generous — but commonplace — defined contribution provision.
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