This morning it was reported by the FT that Tata Steel has offered to make a one-off payment of £520m to the British Steel Pension Scheme, in exchange for the Trustees giving up a guarantee over some of Tata's Dutch assets.
Discussions have been taking place for several months between the Trustees, Tata, the Pensions Regulator and the PPF, about a potential separation of the British Steel Pension Scheme from Tata. This would probably be achieved through a Regulated Apportionment Arrangement ("RAA"). Removing the guarantee over the Dutch assets would be an important step in this process.
To agree to an RAA, the Pensions Regulator must be convinced that an insolvency would be inevitable if no action were taken. Demonstrating this point could be difficult, particularly with the improvement in the steel industry over the last year.
In addition, Tata needs to offer a settlement to the British Steel Pension Scheme which is more than they would receive from Tata in an insolvency process.
It appears that the existing guarantee over Tata's Dutch assets would provide a substantial boost to the British Steel Pension Scheme's recovery on insolvency. As precise details of the Dutch assets which are part of the guarantee are not in the public domain, it is not possible to accurately quantify the extent to which the British Steel Pension Scheme would expect its recovery to be improved through the guarantee. However, we would expect that the Trustees will only be willing to give up this guarantee if the £520m being offered exceeds the recovery they would expect to be able to obtain from these assets through an insolvency process.
The Trustees will also want to understand where the £520m would be coming from. If it is funds which would be injected by a parent company (so not currently within their employer covenant net) this would be better than it weakening the balance sheet of Tata Steel UK, their sponsoring employer.