Tata Steel: cutting the pensions gordian knotPrint publication
The Pensions Regulator announced on 11 August 2017 that it had given its initial approval to a proposal from Tata Steel UK Limited (Tata Steel) to a regulated apportionment arrangement which would allow the restructuring of the British Steel Pension Scheme (Scheme). This Insight looks at this announcement and the implications for future such restructurings.
Pensions and distressed companies: a quick reminder
Defined benefit scheme deficits are a particular problem for companies in financial distress. In most situations the defaulting company will trigger a statutory debt which will significantly (and, in some cases, massively) increase the loss creditors will suffer if the company enters into a formal insolvency process. Further, achieving the turnaround of a distressed situation is made more difficult by the need to pay substantial deficit repair contributions and an increased PPF levy (to reflect the increased likelihood of formal insolvency arising from that distress).
Upon a formal insolvency procedure commencing, subject to satisfying certain eligibility criteria, the scheme will fall into the Pension Protection Fund (PPF), the safety net for such schemes. However the little used regulated apportionment arrangement (RAA) exists as a possible escape route to assist in putting a turnaround strategy into effect.
The key conditions for an RAA are:
- there is a “reasonable likelihood” that the scheme will enter into a PPF assessment period in the next 12 months, or that the scheme is already in an assessment period
- the distressed company’s scheme liabilities are apportioned to one or more of the remaining scheme employers (which may be a shell company set up in order to trigger an insolvency event and lead to the scheme going into PPF assessment without affecting any wider group companies) and
- approval from the Pensions Regulator (Regulator) and the PPF must not object.
RAAs are rare because the involvement of the Regulator and the PPF inevitably means that there is a “price” for consent. This “price” usually entails a significant payment into the scheme and an equity stake in the surviving company.
Tata Steel: the background
Tata Steel is a subsidiary of Tata Group, a multi-national company. In March 2016 Tata Group announced that it needed to cut its losses in the UK. Tata Steel had reportedly lost £2bn in five years and Tata Group stated that it was unable to sustain such exposure. Tata Group wished to restructure the UK steel business and then sell Tata Steel.
One of the key stumbling blocks to any sale of Tata Steel is the Scheme. The Scheme is the legacy British Steel scheme which at December 2015 had an ongoing deficit of £700m and a buy-out deficit (the cost of securing liabilities with an insurance company) of £7.5bn. The vast majority of the Scheme’s liabilities are not attributable to Tata Steel’s current employees. Any potential purchaser for Tata Steel would not want to take on the Scheme’s liabilities.
The Government is committed to sustaining the steel industry in the UK. It consulted in March 2016 on various proposals to separate the Scheme from Tata Steel. The Government has not yet responded to this consultation but stated on 11 August 2017 that it wants to ensure the best outcome for Scheme members.
Tata Steel: the proposed solution
The Regulator has given its initial approval to the following restructuring of the Scheme:
- a RAA will be entered into
- Tata Group will pay £550m into the Scheme, this is significantly more than the Scheme would receive on the insolvency of Tata Steel and
- The PPF will receive a 33% equity stake in Tata Steel.
In addition to the above, Scheme members will be given the choice to either transfer into a new scheme (which will reduce member benefits) or remain in the Scheme which will transfer into the PPF.
The Regulator has also said that it will not take any other regulatory action (its anti-avoidance powers) in relation to the restructuring. As long as no party objects, formal approval by the Regulator should be granted in 28 days.
To date there have been very few RAAs probably because of the very high regulatory hurdles which need to be satisfied. However, recent events, including the Tata Steel case itself, may indicate that there is a change in the air.
It is an accepted principle of pensions law that members cannot give up the benefits they have accrued in a pension scheme. However, the Tata Steel solution shows that, in the right circumstances, it may be appropriate for members to be asked to agree to accept lower benefits in a new scheme.
The Government indicated in its recent Green Paper that it is willing to consider making it easier to separate schemes from struggling employers and also making it easier for members to be transferred to schemes providing lower benefits. A Pensions White Paper is expected “in the Winter”. It will be interesting to see whether or not the Government is willing to provide somewhat more of a lifeline to struggling employers with seemingly unsustainable defined benefit pension deficits.