UK: The Government's Consultation On Pension Increases In The British Steel Pension Scheme

Last Updated: 27 June 2016
Article by Elmer Doonan, James Borshell and Michael Bronstein

The DWP's consultation on changing the law to allow pensions increases to be reduced to the statutory minimum in the British Steel Pension Scheme (BSPS) ends on 23 June.  It is likely that one of the proposals in the consultation will be adopted, perhaps, in a modified form within a short time thereafter.

The BSPS has a deficit of £7.5 billion on a section 75 (or buy-out) basis.  Tata Steel, the sponsoring employer, cannot meet that liability and there is no realistic possibility that anyone will buy Tata Steel with that liability attached to it.  Separating the BSPS from Tata Steel would, we are told, save the steel industry, and this is the main aim of the proposals.  Another aim of the proposals is to put BSPS members in a better position than they would be in if the BSPS entered the PPF.  The consultation paper notes that the PPF would have to find £1.5 billion if the BSPS entered the PPF to provide its members with PPF compensation.  That would force the PPF to increase its levies to other pension schemes.  If  BSPS members' pension increases (and revaluation) are reduced this would improve the funding position of the BSPS and enable it to be run outside the PPF with a new sponsoring employer in place of Tata Steel.

The proposals

Two main proposals in the consultation would reduce revaluation of deferred pensions and increases in pensions in payment.  These are:

Proposal 1.  Regulations permitting BSPS to reduce revaluation and increases.

Section 67 of the Pensions Act 1995 prohibits a reduction in a member's accrued pension rights without their consent.  This  includes the right to revaluation of a deferred pension or increases to a pension at the amounts specified in the rules.  For example, if pension scheme rules provide for fixed 3% increases then section 67 makes it unlawful to reduce them to 2%.   If, as appears to be the case in the BSPS, increases are based on RPI up to various ceilings it would normally be unlawful to change the capped RPI basis to the lower capped CPI basis.  Proposal 1 is that regulations are introduced by the Government to dis-apply section  67 to the BSPS and allow it to be amended so that, in effect, increases are limited to CPI up to 2.5%.  The Regulations would (i) enable the BSPS Trustees to make the change unilaterally without member consent; (ii) require the BSPS Trustees to decide this was in members' best interests; and (iii) require the BSPS Trustees to agree the change unanimously. 

Will Proposal 1 work?

It is questionable whether this proposal is consistent with the Humans Rights Act 1998 and, in particular, the Government's obligations under Protocol 1 Article 1 of the European Convention on Human Rights.   Article 1 protects the property rights of an individual from interference by the state unless this is in the public interest.  The right to a pension increase almost certainly falls within Article 1.  The only issue is whether the proposed change would be in the public interest.  It may be in the public interest to save the steel industry but that does not mean it is in the public interest for BSPS members to be forced to sacrifice their rights to achieve this aim.  If this proposal is implemented the risk of a challenge will be high.  That could come from a BSPS member or a spouse or dependant who has a contingent interest under the BSPS.  One might expect BSPS members to ask why the Government did not propose that it would assume responsibility for the BSPS liabilities as in the Royal Mail Pension Scheme rather than interfere with their pension increases.

The BSPS Trustee must decide if the proposal is in members' best interests.  The consultation paper says that 70,000 members would see little change, over 50,000 deferred members would see a minimum 10% reduction in their pensions and 776 would benefit. Why should the deferred members be asked to make the sacrifice?  This would be a huge decision for the Trustees and it is possible that they would seek directions from the court on this issue rather than risk objections from deferred members.  In addition, the BSPS Trustees must act unanimously.  Will a unanimous decision be possible in a Trustee board of 14?

The Government has said that the BSPS is a special case and it does not intend to extend the proposal beyond the BSPS.  There are many pension schemes in a poor funding position and if this proposal is adopted expect others to follow.  If adopted, this proposal would set a terrible precedent that the Government may regret.

Proposal 2. Transfer to a new scheme

Regulations permit a bulk transfer of members from one pension scheme to another without member consent but only if the benefits under the receiving scheme are broadly similar to those in the transferring scheme.  A bulk transfer to a receiving scheme offering poorer pension increases would not be possible under current law.  Proposal 2 is that the bulk transfer regulations should be amended to allow trustees to make a bulk transfer to a scheme providing a lower level of benefits but only if (i) the trustees consider this to be in members' best interests; (ii) they notify each member and a member does not object in a specified time; and (iii) the trustees reasonably believe the scheme will enter the PPF in the next 12 months.   With these changes a new pension scheme could be set up (probably with a new sponsoring employer) which mirrors the BSPS save that it provides lower pension increases.  There would be a bulk transfer without consent of BSPS members to the new scheme unless they explicitly chose not to transfer.  The BSPS would enter PPF assessment as a means of divesting it from Tata Steel and those members who did not consent to the transfer would end up in the PPF. 

Will proposal 2 work?

Proposal 2 does not attract human rights issues.   If adopted, members would be given a choice as to whether they moved to a new scheme with reduced increases or ended up in the PPF. That would reflect the financial reality that the BSPS must face.  Some members who would be better off in the PPF would be able to refuse consent to the transfer to a new scheme.  Members who would not benefit from being in the PPF would have the chance to do better outside the PPF. What is not clear is whether the proposal will enable contracted-out rights to be transferred to the new scheme as, currently, it is not possible to set up a new contracted-out scheme and these can only be transferred to a former contracted-out scheme.

Proposal 2 is not confined to the BSPS.  It could be adopted by other employers who wish to restructure a heavily insolvent employer in order to deal with the pension scheme.  It may provide a solution to cases such as Pollock v. Reed [2015] EWHC 3685 (Ch) where the object was to set up a new scheme with reduced pension increases but the court ruled this could not be done under the current bulk transfer rules.

Under proposal 2 the Trustees will have to decide if a bulk transfer is in the members' best interests.  The Pensions Regulator and the PPF will be involved in any restructuring seeking to set up a new scheme with reduced increases so employers should not view it as a quick and easy solution to resolve their pensions problems.

If proposal 2 is implemented, it may need to be supported by guidance on the calculation of the bulk transfer amount to ensure that the assets are appropriately divided between the old scheme and the new scheme.

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