May 17
Who wins from Tata Steel RAA?

After several months of negotiation, yesterday it was announced​ that the key commercial terms of a Regulated Apportionment Arrangement (RAA) have been agreed in principle, between Tata Steel UK (TSUK) and the Trustee of the British Steel Pension Scheme (BSPS). While not yet signed off by the Pensions Regulator and the PPF, it seems they are on board. However, many of the key details are still to be agreed and will be announced later.

The key aspects of the deal are:

  • £550m will be paid into the BSPS by Tata Steel (probably provided by the parent company or wider group).
  • The BSPS will be given a 33% equity stake in TSUK.
  • Members will be given the option of joining a new scheme on reduced benefits, sponsored by TSUK, or entering the PPF.

The level of benefits which would be provided in the new scheme are yet to be revealed. I would expect the benefit structure to be similar to that offered by the new BHS scheme, which is also being established using an RAA. This would mean that the future increases would be cut on pension built up before 1997. Like BHS, the BSPS mainly provides RPI inflation increases on this pension, but the PPF provides no increases. In the case of BHS, the new scheme will offer 1.8% pa increases, so better than PPF compensation, but expected to be less than the RPI increases members were promised originally (as RPI inflation is currently expected to be around 3.0% to 3.5% pa over the long term).

There are also some members of the BSPS who may get more by going into the PPF than choosing to join the new scheme. This is because around 5,800 members in the BSPS have chosen to have a higher initial pension on retirement, followed by a lower pension once they reach State Pension Age, but the PPF calculates compensation based on current pension levels, without allowing for the reduction which would apply at State Pension Age. It will be interesting to see whether this anomaly is addressed when the details of the RAA are announced, or whether some members will actually gain from entering the PPF.

The new scheme would be supported by TSUK. However, primarily due to the benefit cuts being made, it would be better funded and smaller. This probably means that there would be no deficit, at least initially, so given that the new scheme would also be closed to accrual, no contributions will be payable by TSUK. However, there remains a risk that adverse experience means this will change in future. This risk seems to be material, given that it appears that the Pensions Regulator has refused to allow TSUK to sever the link with the new pension scheme, as is happening in the case of BHS.

It also appears that TSUK will have the power to pull the plug on the establishment of the new scheme, if certain qualifying conditions are not met. This would lead to all members going into the PPF. The conditions have not yet been published, but I expect they relate to the new scheme having a sufficiently high funding level, and the new scheme not being considered excessively large by TSUK.

On the assumption it is ultimately established, the new scheme will therefore pose less risk - but not no risk - to TSUK. It remains to be seen whether this will be sufficient to address the concerns which Thyssenkrupp have around pensions risk, and facilitate a merger.

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