The government plans to overhaul the pension scheme behind lossmaking Tata Steel, despite warnings that it would set a "dangerous precedent". The plans would secure a better deal for the majority of members than entering the Pension Protection Fund (PPF) "lifeboat" and also save the PPF from taking on its biggest bailout to date.
Tata Steel UK's occupational pension scheme is viewed as a major hurdle to any rescue deal for the business, which employs 11,000 people. It has liabilities of almost £15bn, and the deficit has ballooned from £485m to £700m over the past year. The government reckons it would cost £7.5bn to buy out the scheme's benefits, which has been off-putting to potential buyers.
Under the government's strategy, drawn up with trustees, the pension scheme would be spun off into a new financial vehicle, and the scheme's inflation-linked pension increases would be indexed to the consumer price index (CPI) measure of inflation, rather than the retail price index (RPI) measure.
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
As CPI is usually lower than RPI, this should shave billions of pounds off the value of future liabilities. There's just one catch it's illegal. The scheme's trustees have asked the government to exempt the scheme from the 1995 Pension Act, which blocks such changes being made.
Latest Videos FromMoneyWeek
Business Secretary Sajid Javid says the circumstances are "unique". But Hargreaves Lansdown's head of retirement policy Tom McPhail warns that this could "rip a hole in one of the most fundamental principles of pension provision" that once pension benefits are granted they can't be taken away. If other schemes did the same thing, it could cost pensioners across the UK some £200bn in lost retirement income, Jon Hatchett of Hymans Robertson told The Times.
Yet "it may be a blessing in disguise", added McPhail. Some final-salary pension schemes are unsustainably expensive, to the detriment of younger staff. The PPF simply does not have the capacity to bail out every final-salary scheme that is likely to run into trouble in the future. A review of the treatment of such guarantees might be the first step towards a more sustainable, long-term pension landscape.
