B.S. PENSION FUND TRUSTEE LIMITED

Transcription

1 B.S. PENSION FUND TRUSTEE LIMITED 16 June 2016 Pensions Consultation Team Department for Work and Pensions 1 st Floor, Caxton House 6-12 Tothill Street London SW1H 9NA Pensions Administration Office Ground Floor Sentinel 105 Waterloo Street Glasgow G2 7BW Telephone : Sent by to: bsps.consultation@dwp.gsi.gov.uk British Steel Pension Scheme This is a response from the trustee of the British Steel Pension Scheme to the Consultation Document of 26 May It has been unanimously approved by the trustee board. 1. Better outcomes for BSPS members 1.1 Tata Steel is currently exploring all options for portfolio restructuring including the potential divestment of Tata Steel UK ("TSUK"). Tata Steel has indicated that the UK business is not considered sustainable if it is required to support the risks and liabilities associated with the BSPS as currently constituted. 1.2 If there is no buyer and TSUK can no longer rely on financial support from the rest of the Tata Steel group, it seems very likely that TSUK will become insolvent and that its business will be closed down and/or broken up. 1.3 In all of these scenarios, it is likely that BSPS will be required to go into the Pension Protection Fund. Its members would then be paid PPF compensation. 1.4 The Consultation Document looks at ways of modifying BSPS to avoid the otherwise inevitable entry into the PPF. This has the support of the BSPS Trustee as it would allow the Scheme to pay benefits in excess of PPF compensation to most of its members. 1.5 The PPF is an important safety net for pension schemes. However, going into the PPF would not be the best or fairest outcome for BSPS members. 1.6 BSPS is a very large, well-funded scheme. Our proposals involve BSPS staying out of the PPF and continuing to provide members' promised benefits except as regards pension increases (see below). This would deliver outcomes at least as good as PPF compensation for the vast majority of members (the main exception being High/Low pensioners see below) and materially better for many. Registered Office: 17th Floor, 125 Old Broad Street, London EC2N 1AR Registered No (Incorporated in England)

2 1.7 We should emphasise that we are proposing benefit modifications only if otherwise BSPS would go into the PPF. 1.8 We should also emphasise that we would wish to modify benefits in order to keep BSPS out of the PPF in all scenarios where otherwise BSPS would go into the PPF. They include a sale of the TSUK business to a buyer who will not take responsibility for BSPS, even after the benefit modifications, and they include a freefall insolvency of TSUK. 2. Best use of BSPS assets 2.1 Our proposals would reduce BSPS liabilities so that BSPS is fully funded on a self-sufficiency basis and can operate indefinitely as a stand-alone scheme, outside the PPF, providing better benefits than PPF compensation. 2.2 The cost of providing modified benefits from a self-sufficient BSPS is less than the price of securing those benefits by the purchase of annuities. Insurance companies must meet the additional cost of their regulatory capital requirements and they must aim to make profits for their shareholders. 2.3 PPF compensation has a similar price. An insolvent employer's pension scheme with assets just short of the amount needed to buy annuities equivalent to PPF compensation must go into the PPF, meaning that the price of the PPF compensation is just short of the buy-out cost. 2.4 Once a scheme has gone into the PPF, the PPF values its liabilities to pay compensation not by reference to buy-out cost but by reference to the market value of assets that can be expected to generate investment returns that will enable the PPF to pay the compensation as it falls due. On that basis, the PPF's latest accounts show that it has a significant surplus. If BSPS were to go into the PPF, it would considerably swell that surplus. This would not be the best use of BSPS funds from the perspective of BSPS members. 2.5 BSPS is a very large scheme. It is about two-thirds the size of the PPF (as reported in its latest accounts). It does not have sufficient assets to purchase annuities equivalent to PPF compensation, but it does have sufficient assets to provide better benefits than PPF compensation by continuing to operate outside the PPF on a stand-alone basis or with a sponsor that has limited financial resources. 2.6 We are currently discussing with the Pensions Regulator and the Government how we would restructure our investments so that we hold assets that can be expected, with a high degree of confidence, to generate cash inflows matching the cash outflows of our benefit liabilities for the natural lifespan of the scheme (or until it is possible and sensible to secure benefits with insurance companies). 2

3 3. Risks to PPF 3.1 If BSPS were to go into the PPF now, the PPF would take over BSPS assets and would have to pay compensation to BSPS members. If BSPS stays out of the PPF, is there a risk that BSPS might fall into the PPF at some future date and that the PPF will then be worse off than if BSPS had gone into the PPF now? 3.2 Achieving self-sufficiency means that there is a very low risk of BSPS requiring further contributions from any sponsor or of BSPS having to go into the PPF at any time in the future. We appreciate that the Government will need to be satisfied about that before it agrees to help us to implement our proposals. This may depend partly on the separation terms to be agreed with Tata Steel and the nature of the BSPS sponsor after separation. 3.3 No PPF eligible pension scheme poses zero risk to the PPF. At present, BSPS represents a significant and immediate risk because it has a section 179 deficit, TSUK is a weak sponsor, BSPS is holding some equity investments, and BSPS is paying benefits (and increasing them each year) at significantly higher levels than PPF compensation. Our proposals would substantially reduce that risk to a much lower level than most other schemes. 3.4 Our investment policies will be similar to those of the PPF but will involve significantly less risk. Accordingly, if BSPS were to fall into the PPF at some point in the future because of sustained worse investment performance than anticipated, it is likely that the PPF will then be in a better position than if BSPS had gone into the PPF now. 3.5 The PPF does not hedge its longevity risk. We would seek to hedge BSPS longevity risk as and when market conditions made this attractive. 3.6 If our proposals are implemented, BSPS will have negative PPF priority drift (see section 6), meaning that it would be better for the PPF if BSPS stays out of the PPF for at least the next ten years. We expect to be able to demonstrate long-term self-sufficiency over that period. 3.7 Restructuring the BSPS investments as part of a transition to self-sufficiency involves some investment transition risk, but the same investment transition risk would arise for the PPF if BSPS were to go into the PPF now. 3.8 Our proposals, for the BSPS to stay out of the PPF, therefore involve less cost and less risk for the PPF and its levy payers than immediate PPF entry and would be beneficial to the PPF and to PPF levy payers. 4. Proposed modifications 4.1 The modifications that we have proposed in order to reduce BSPS liabilities so that BSPS can be fully-funded on a self-sufficiency basis, are as follows: (i) Future increases to pensions when in payment are limited to those required by legislation. 3

4 (ii) (iii) (iv) Increases to deferred benefits for future periods of deferment are calculated using CPI instead of RPI (but are otherwise unchanged contrary to what is stated in the Consultation Document, see section 4.5(ii)(c) below). The trustee has a power to reinstate pension increases if and when it is financially safe to do so. No surplus can be paid to any sponsor or employer in any circumstances. 4.2 These proposals represent better and fairer outcomes for members than PPF compensation. They also reflect the basis on which BSPS was established in The BSPS trust deed and rules made it clear that pension increases would be payable only if and for so long as they remained affordable. In particular: (i) (ii) (iii) (iv) the employers could limit their contributions to twice members' contributions, in which case the trustee could reduce future increases; the requirement for employers to pay deficit contributions was limited by specifying that deficits must be calculated ignoring future pension increases; the winding-up priorities put future pension increases last; and the power of amendment had restrictions to protect accrued benefits but specifically allowed the employer to reduce future increases if necessary having regard to the financial position of the scheme. BSPS thus had features of a "shared cost" scheme and a "defined ambition" scheme. 4.3 We think that reducing future pension increases as proposed is the most appropriate way of reducing BSPS liabilities. In any case, the BSPS power of amendment cannot be used to reduce accrued liabilities in any other way. 4.4 Future pension increases cannot be reduced uniformly for all members because of the statutory requirements for post-1997 accruals and post-1988 GMPs If BSPS is able to remain outside the PPF providing benefits with these modifications: (i) None of the 58,000 members below age 65 would suffer the immediate reduction in benefits that would result from PPF entry. That reduction would be at least 10%. For some 776 members, the immediate reduction would be more than 10% because of the PPF compensation cap. 1 BSPS was contracted out of the State earnings-related pension scheme between 1978 and 1997 and so must pay pensions at least equal to members' so-called guaranteed minimum pensions ("GMPs"), calculated in accordance with legislation. That legislation requires GMPs accrued between 1988 and 1997 to be increased annually when in payment in line with price inflation up to 3%. The proposals do not entail changing these increases. 4

5 (ii) The increases to benefits provided by BSPS would be at least as good as increases to PPF compensation, and for most members would be better. In particular: (a) (b) (c) (d) PPF compensation for pre-1997 accruals has no increases in payment. BSPS would provide increases on GMPs accrued between 1988 and Annual increases to PPF compensation for accruals between 1997 and 2005 are capped at 2.5%. BSPS increases would be capped at 5%. PPF compensation is revalued during deferment by reference to CPI with caps of 5% per annum for pre-2009 accruals and 2.5% per annum for post-2009 accruals. Under BSPS, deferred pensions are mostly revalued by reference to RPI without caps. Under our proposals, RPI would be replaced with CPI for future periods of deferment but (contrary to what is said in the Consultation Document) no new caps would be introduced. 1 There is no prospect of surplus in the PPF being used to improve PPF compensation. If BSPS remains outside the PPF with modified benefits, surplus is available to reinstate pension increases under our proposals. (iii) (iv) The vast majority of members would have more valuable death benefits paid to their survivors under BSPS than PPF compensation. Members whose pensions have not come into payment will still be able to take transfers in order to take advantage of the freedom and choice now available in personal pension schemes. It is not possible to take a transfer from the PPF. 4.6 It is true that members whose pensions were earned wholly or mainly before 1997 might see little or no future increases to their pensions whilst in payment. But the same (or worse) would happen with PPF compensation. It should also be noted that existing pensioners in this group have enjoyed full RPI indexation since retirement, whereas future pensioners will not. If circumstances allow us to reinstate pension increases in the future, we would expect to prioritise pre-1997 accruals. 4.7 We have written to all members and pensioners explaining the proposed modifications in detail. The letter is available on our website at 5. PPF compensation: the "cliff edge" and the cap 5.1 The way PPF compensation is calculated involves an arbitrary "cliff edge" at normal pension age ("NPA"). Members below NPA when a scheme goes into a PPF assessment period receive compensation at the 90% level, whereas those above NPA receive compensation at the 100% level. 1 The Consultation Document says (paras 84 and 105) that we have proposed reducing indexation and revaluation to the minimum level required by law. That is not so for revaluation. We wish simply to replace RPI with CPI for revaluation for future periods of deferment, without imposing the 5% and 2.5% caps permitted by law. 5

6 5.2 Members below NPA are also subject to the PPF compensation cap. This cap restricts PPF compensation for members at age 65 to 33,678 per annum, but lower caps apply at younger ages. 5.3 For members who have already retired, the cap is reduced on account of any lump sum taken at retirement. 5.4 Although the BSPS NPA is technically age 65, most active members retire at or before age 60. At age 60, the maximum PPF compensation is 29,050 per annum. For a pensioner who exercised the commutation option at retirement, it would be substantially less than that. 5.5 We consider the 90%/100% differential before and after NPA to be arbitrary and unfair in circumstances where it is possible to maintain the BSPS outside the PPF. Our proposals avoid such a cliff edge. 5.6 We understand the policy reasons for having a PPF compensation cap. However, if BSPS avoids PPF entry, there will be no call on PPF levy payers and so the rationale for a cap will not apply. 5.7 In any case, we think that the PPF compensation cap in its current form is a blunt instrument. Members have benefits based on pay and length of pensionable service. The cap could affect both high earners with short service and relatively modest earners with long service. We would therefore encourage the Government to bring into force the provisions of the Pensions Act 2014 that would increase the PPF compensation cap by 3% for each year of service over twenty years. 6. High/Low pensioners and "negative PPF priority drift" 6.1 BSPS members have an option for active members taking early retirement to replace the normal scheme pension with a higher pension until state pension age ("SPA") and a lower pension after SPA, on actuarially neutral terms. The step-down at SPA is based on the State basic pension. This is a popular option that allows members to arrange a more level total income before and after SPA by having a "bridging pension" from BSPS until SPA. 6.2 There are currently 5,800 pensioners who exercised this option and who have not yet reached SPA. If BSPS were to go into the PPF now, the PPF would pay compensation based on the current High level of pension for the rest of the pensioner's life, with no reduction at SPA. Most of these pensioners would therefore enjoy a windfall benefit if BSPS went into the PPF before they reached SPA, even after taking account of the immediate 10% reduction. However, if BSPS stays out of the PPF until after these pensioners have reached SPA, their PPF compensation would be based on the Low level of BSPS pension if the Scheme subsequently did go into the PPF. 6.3 We have been advised that the cost to the PPF and so to levy payers - of the windfall for the 5,800 High/Low pensioners would be approximately 500 million. 6

7 6.4 The Pensions Act 2008 includes provision for regulations to address this anomaly. That provision has not yet been brought into force. The Consultation Document gives no indication of whether or when the Government intends to make regulations to neutralise this anomaly. 6.5 Meanwhile, the effect of the anomaly is that, if BSPS stays out of the PPF providing modified benefits as proposed, there will be "negative PPF priority drift". 6.6 A scheme that is in deficit (by reference to PPF liabilities under section 179 of the Pensions Act 2004) and which stays out of the PPF with inadequate employer contributions will normally experience "PPF priority drift". That is mainly because, as each year goes by, more members reach NPA and so would not be subject to the 10% reduction and PPF compensation cap if the scheme were then to go into the PPF and, meanwhile, pensions are being paid (and may be increased) at higher levels than would have applied for PPF compensation. Consequently, if and when the scheme later falls into the PPF, the cost to the PPF is greater. 6.7 That will not be the case for BSPS for at least the next ten years. This is because, as High/Low pensioners reach SPA, the amount of PPF compensation that would be payable on PPF entry is reduced. This effect more than compensates for any PPF priority drift. The net effect is negative PPF priority drift. 6.8 In other words, it would be better for the PPF and its levy payers if BSPS is modified as proposed and PPF entry is delayed for at least ten years. 6.9 If BSPS is modified and stays out of the PPF, we believe that High/Low pensions should be reduced at SPA in accordance with the terms agree with those pensioners at retirement. Any alternative would result in an unintended windfall compared with other members. 7. Other members who might be better off with PPF compensation 7.1 There are some members who were transferred into BSPS from other schemes as pensioners or deferred pensioners with unchanged benefits when those schemes were merged into BSPS. For some of these members, the benefits payable to survivors on death could be less than the equivalent PPF compensation. For this reason, some of these members might consider PPF compensation to be more valuable than modified BSPS benefits. The cost of improving these members' death benefits so that they are not less than PPF compensation would be 1.2 million. 7.2 The early retirement and commutation factors currently used by the PPF may be different from the factors currently used by BSPS. However: (i) (ii) PPF commutation affects the contingent survivors' benefits whereas, in BSPS, commutation does not affect survivors' benefits; BSPS members have shorter average life expectancies than currently assumed by the PPF; given the large number of BSPS members, the PPF can be expected to change its factors if BSPS goes into the PPF; 7

8 (iii) (iv) If BSPS stays out of the PPF, its actuarial factors will be reviewed and will take account of the modification to future pension increases and changes to our investment policies: If BSPS goes into the PPF, members below age 65 will suffer an immediate reduction in benefits of at least 10% 7.3 As with the High/Low pensioners, we see no reason to ensure that, if BSPS stays out of the PPF, members or survivors always receive benefits at least equal to PPF compensation if (because of the "one size fits all" design) that compensation would be more than BSPS benefits. No scheme is required to increase its benefits to match PPF compensation. During a PPF assessment period or on winding-up, a scheme might be required to restrict its benefits to PPF compensation levels but it is not required to increase benefits that are less than PPF compensation. 8. Achieving separation 8.1 The Consultation Document outlines routes by which BSPS could be separated from the TSUK business and the rest of the Tata Steel group. 8.2 Our objective is to ensure that separation does not result in PPF entry if better outcomes can be achieved for members by staying out of the PPF and providing modified benefits. 8.3 TSUK would not be able to pay the statutory debt that would become due under section 75 of the Pensions Act 1995 if TSUK had an "employment cessation event"(as defined in the section 75 regulations) or an insolvency event or if BSPS was wound up. 8.4 We therefore expect that separation will involve a Flexible Apportionment Arrangement or a Regulated Apportionment Arrangement. We see no need for the section 75 regulations to be changed for this to happen. 8.5 Separation would involve the release of limited guarantees and security provided to BSPS by other Tata Steel group companies. 8.6 We are in discussions with Tata Steel and the Pensions Regulator about the ways in which separation could be achieved and the terms on which it might be agreed. 8.7 If there is no buyer for the TSUK business and Tata Steel is no longer willing and able to support TSUK, we will face the prospect of TSUK insolvency. In that event, we would still wish to find a solution that enables BSPS to stay out of the PPF providing modified benefits. This would require BSPS to have a new sponsor but it could be a special purpose vehicle with limited capital. As explained above, this would be a good outcome for BSPS members and for the PPF. 8

9 9. Disapplication of section As noted in 4.2 above, the BSPS trust deed and rules include unusual provisions that make future pension increases subject to affordability and allow future increases to be reduced in circumstances such as these (both for deferred pensions and for pensions in payment). 9.2 However, since BSPS was established, the Pensions Act 1995 was enacted and section 67 is now an obstacle to the use of that power. 9.3 Section 67 applies to the exercise of a power to modify a pension scheme. It protects members by allowing the Pensions Regulator to make void any modification that adversely affects a member s accrued rights unless the member has consented to it. It is debatable whether section 67 does or should apply to the unusual provisions in BSPS. 9.4 Section 67 specifically allows the Secretary of State to make regulations that disapply section 67 to a particular scheme. 9.5 We have asked the Secretary of State to use this power so that the Scheme s unusual powers can be used in the way intended: to reduce future increases at a time when they can no longer be afforded. This will achieve a better outcome for members than going into the PPF. 9.6 We agree that the legislative framework safeguarding pension schemes, including section 67 and the PPF, should not be changed without full and careful deliberation and debate. However, BSPS is a special case. (i) (ii) (iii) (iv) The TSUK situation has come under intense scrutiny by the Government and the Pensions Regulator. A genuine crisis point has been reached for TSUK and the UK steel industry. TSUK is unable to underwrite BSPS in its current form. It is clear to us that BSPS will go into the PPF unless its liabilities are reduced in accordance with our proposals. Those proposals will not go ahead unless PPF entry is the only alternative. BSPS has an unusual constitution which expressly allows reductions in pension increases if they are unaffordable. BSPS is sufficiently well funded and large enough to be able to provide better benefits for members than they would get from the PPF. If BSPS is allowed to stay out of the PPF, it will have negative PPF priority drift for the next 10 years, giving it plenty of time to demonstrate self-sufficiency. 9.7 Section 67 should be disapplied in these special circumstances because, instead of protecting members, it is an obstacle to achieving the best outcome for members. 9

10 10. Scope of BSPS amendment power 10.1 The amendment power in the BSPS trust deed is wide enough to make the proposed modifications for all members BSPS was established in 1990 and replaced a predecessor scheme. The pensioners of the predecessor scheme were transferred to the new BSPS in A group of those pensioners then raised concerns about the security of their future increases. We are investigating the terms on which that dispute was settled in Of the total reduction in BSPS liabilities that would result from our proposed modifications, no more than 4% relates to these pensioners. The funding position of the scheme will not be materially affected by whether or not it is possible to modify benefits for this group. The trustee will be taking further legal advice on this question when the outcome of the Government s consultation is known. 11. Conditions for allowing benefit modifications 11.1 The Consultation Documents suggests that disapplication of section 67 for BSPS should be subject to conditions (paragraphs , 141, 143 and 148) The power of amendment in the BSPS trust deed is vested in TSUK. We agree that section 67 should be disapplied only for the proposed modifications to pension increases and only with our consent The Consultation Document suggests that the trustee's decision should be "unanimous". The trustee is a sole corporate trustee which has a board of 14 directors: 7 appointed by TSUK (including the chairman, who stopped working for TSUK many years ago and is a BSPS pensioner); 6 nominated by the National Trade Union Steel Co-ordinating Committee (NTUSCC); and one nominated by pensioners. The trustee board normally reaches consensus when making its decisions and was unanimous in asking for the Government's help in achieving the objectives outlined above. Notwithstanding this, we believe the trustee should be able to make decisions in accordance with its articles of association, thus mitigating the risk of any procedural uncertainties about the effect of vacancies on the trustee board, non-attendance at trustee board meetings and abstentions The Consultation Document suggests that the regulations should disapply section 67 only if the trustee agrees that the modifications would be "in the best interests of the scheme members". If there is to be such a condition, we would need to understand exactly what it required and how it affected our existing fiduciary duties. It might be in the interests of a small minority of members for BSPS to go into the PPF (in particular, some of the High/Low pensioners) but that should not stand in the way of modifications for BSPS as a whole that would clearly be in the interests of all other members and the Scheme as a whole. 10

11 11.5 The Consultation Document states that the Government may wish to impose a condition relating to the identity of the sponsoring employer and an independent assessment of the scheme's funding. As outlined above, we would ask for section 67 to be disapplied so that our objectives can be achieved in all circumstances in which otherwise BSPS would go into the PPF. We anticipate that the Government or the Pensions Regulator will need to be satisfied that this will not ultimately work to the disadvantage of the PPF. We have addressed this concern in section 3 above and are working with Government officials and the Pensions Regulator so that they may have a full understanding of the current BSPS funding position. We will know more about any future BSPS sponsor when Tata Steel has completed the current review process and a sale and/or separation terms have been agreed The Consultation Document suggests that the proposed modifications would be conditional on closure to all accruals. We anticipate that termination of defined benefit accrual will happen as part of any outcome for TSUK. However, BSPS has a defined contribution section and there might be outcomes in which the DB section is terminated but the DC section is kept open The Consultation Document states that, if the proposed modifications are made, there should be no possibility of any surplus being paid from BSPS to any employer. We agree: surplus should be used to improve the security of members' benefits or to reinstate pension increases, as the trustee may decide in accordance with its fiduciary duties (see 4.1 above) The Consultation Document says that the Government is considering making it a condition of the proposed new section 67 regulations that the Pensions Regulator agrees with the proposed modifications to members' benefits. As it is proposed that the new regulations would apply only to BSPS, and if the Government is satisfied on all the other conditions (about which it is able to consult the Pensions Regulator), we see no need for this further condition. In any case, this should not be allowed unduly to delay or jeopardise implementation of the section 67 solution. 12. Bulk transfer to a new scheme 12.1 Our strong preference is for section 67 to be disapplied so that pension increases can be modified as proposed if otherwise BSPS would go into the PPF The Consultation Document asks about another means of achieving a similar outcome that would involve a bulk transfer to a new scheme. The new scheme would provide the same benefits for transferring members as under BSPS except for the proposed modifications to pension increases. Members staying behind in BSPS would end up with PPF compensation because BSPS would go into the PPF after the bulk transfer was made. Bulk transfer/ppf arrangements of this sort have been carried out by other schemes in the past. 11

12 12.3 Under current law, a member can be included in such a bulk transfer only if he or she consents. This means that many members could end up with PPF compensation even when it would be in their interests to transfer to the new scheme. BSPS has 130,000 members and pensioners. Some might not be able to give consent, or might fail to do so, for all sorts of reasons. Some will be incapable of responding or incapable of giving valid consent. Many might ignore the communication, or not get round to dealing with it in the time allowed. BSPS has 30,000 deferred pensioners and we are most unlikely to have current addresses for all of them. We do not think that these would be good reasons for people to end up with PPF compensation if they would be better off with modified benefits in the new scheme We would wish to be able to include members in a bulk transfer without their consents if we think that this would be in their interests (because BSPS will be going into the PPF and the new scheme would provide more valuable benefits than PPF compensation). We would therefore encourage the Government to change the law to permit this We agree that, if the law is changed in this way, members should be given an opportunity to opt out of the bulk transfer. In other words, the change in the law would simply enable us to change a member's default option from PPF compensation (as would be required under current law) to modified benefits in the new scheme Carrying out a bulk transfer exercise would be a huge exercise that would take months to complete, whether or not regulations are made to allow members to be included without their consents. We would wish to give members detailed information about their options, including information about the benefits they would receive from the new scheme and the compensation they would receive if they stayed in BSPS and it went into the PPF. Some of that information is not readily available (for example, the split of benefits between pre and post 1997) because it is information that has never been needed in order to administer the BSPS. This information will take time to obtain. That would delay any bulk transfer (but would not delay making modifications to BSPS Rules if regulations are made under section 67, which is our preferred option) It would be necessary to split the BSPS assets between those being transferred to the new scheme and those being retained for members who are not transferring and who will therefore end up with PPF compensation. The basis for allocating assets between the new scheme and the PPF is not obvious. Paragraph 150v of the Consultation Document suggests that the amount transferred to the new scheme should be unreduced cash equivalent transfer values (CETVs). However, if BSPS has a surplus on the CETV basis at the time of the transfer, a proportionate share of that surplus should be included in the transfer ie, the whole surplus should not be retained for the PPF We should also note that a CETV is calculated as the amount required to make provision within the scheme for the member's benefits using best estimate assumptions and having regard to the scheme's investment strategy. Our investment strategy is under review and so we may need to change our CETV basis before making a bulk transfer. 12

13 12.9 There would be considerable cost in establishing a new scheme (with all the requisite constitutional, governance and regulatory arrangements) and transferring to it the best part of 13.6 billion investments (including investments in properties, various funds, derivative contracts, and so forth) It is likely that almost all High/Low pensioners would choose to stay in BSPS with a view to receiving PPF compensation. The assets to be retained for these pensioners (and so transferred to the PPF) would be calculated by reference to their BSPS benefits in the same way as for other members. This means that the 500 million windfall cost would fall on the PPF and its levy payers (see 6.3 above) If all or most High/Low pensioners go into the PPF, the new scheme will not have negative PPF priority drift (see 6.7 above) In any case, the viability of the new scheme could depend on which members took the transfer option. It might therefore be necessary to make the transfer conditional on the scale and profile of the transferred membership In conclusion, the bulk transfer solution is much less likely to achieve the best outcomes for BSPS members and the UK steel industry than the section 67 solution, even if the law is changed so that bulk transfer can be the default option, for the following reasons: (i) (ii) (iii) (iv) (v) It would take several months to complete the bulk transfer, meaning that it would have to happen after Tata Steel has implemented its decision about TSUK. This would be problematic or impossible in most scenarios. For example, if BSPS goes into a PPF assessment period, no bulk transfer would be possible. There would be considerable cost in establishing a new scheme (with all the requisite constitutional, governance and regulatory arrangements) and transferring to it the best part of 13.6 billion investments (including investments in properties, various funds, derivative contracts and so forth). There are difficult questions and practicalities in splitting BSPS assets between the new scheme and the PPF. The bulk transfer solution would give High/Low pensioners a windfall, at significant cost to the PPF. There would be uncertainty about the financial position of the new scheme until the bulk transfer is made. This makes it difficult to be sure that the new scheme will be self-sufficient and for any buyer of the TSUK business to agree to be its sponsor As noted in the Consultation Document (paragraph 129), if the bulk transfer solution is preferred and we are to be allowed to include members in the bulk transfer without their consents, it will be necessary to change the contracting-out regulations as well as the regulations under section 73 of the Pension Schemes Act

14 12.15 The Consultation Document anticipates that the new scheme would need to be separated from TSUK (paragraph 122). This presupposes that the new scheme would be established by TSUK. It may be that the new scheme could be established by a new company initially connected with TSUK but which is then transferred to new ownership. That would avoid any need for a Flexible Apportionment Arrangement or a Regulated Apportionment Arrangement for the new scheme. 13. Safeguards for a bulk transfer 13.1 The Consultation Documents proposes some safeguards that would apply if the law were to be changed to facilitate the bulk transfer solution (paragraph 127) The first is that the trustee should not be able to include a member in a bulk transfer without his or her consent unless the trustee considers this to be in the member's best interests. Whether or not it is in a member's interest to be included in the bulk transfer may depend on matters such as when they will die and whether they will be survived by a spouse or civil partner. We would therefore ask that it be made clear that the trustee could make that decision according to its assessment of the balance of probabilities using only the information already held by the trustee. We would also ask that, if a member is wrongly included in the bulk transfer, remedies should not include a transfer back to BSPS/PPF. The second safeguard is also relevant The second safeguard is that members are notified and given an opportunity to opt out of the bulk transfer. We would ask that the notification requirement should be limited to reasonable endeavours (as already applies with other regulatory requirements). That is because we cannot be sure that we have current contact details for all members The third safeguard is that the trustee must reasonably believe that BSPS will go into a PPF assessment period within 12 months. As already noted, we wish to modify members' benefits only if we think that members will otherwise receive PPF compensation The Consultation Document also envisages that there would be some conditions that would have to be satisfied before regulations are made to facilitate the bulk transfer solution. These are the same as proposed conditions for the section 67 solution and we would make the same comments about them (see 11.5 to 11.8 above). 14. Scheme governance 14.1 The BSPS trustee board is currently focused on achieving the best outcome for BSPS members in the context of Tata Steel's review of the TSUK business The most appropriate arrangements for the future governance of BSPS and/or a new scheme will depend on the outcome of that review and decisions made by Tata Steel affecting TSUK and BSPS. 14

15 14.3 We have not yet given much thought to this question. Of course, we would wish to ensure that BSPS or a new scheme has governance arrangements that are appropriate to its circumstances This question falls squarely within the remit of the Pensions Regulator and we think that the Pensions Regulator is adequately equipped to ensure that suitable arrangements are made In practice, we would expect to help develop suitable governance arrangements in consultation with the Pensions Regulator and with other parties still involved in the scheme, including the trade unions and (if appropriate) any company that has acquired the TSUK business and/or becomes the BSPS sponsor If BSPS or a new scheme does not have TSUK (or any other company that has acquired the TSUK business) as its sponsor, and instead the sponsor is a special purpose vehicle, we would wish to have governance arrangements that ensured the constitutional and operational independence of the trustee. This might involve a trustee board that includes some independent trustee directors as well as member-nominated trustee directors. 15. Draft regulations 15.1 We have highlighted in this document some points that would need to be taken into account when drafting any regulations We hope to have an early opportunity to comment on draft regulations so as to help ensure that they achieve their purpose and do not give rise to unforeseen or unnecessary difficulties. 16. Conclusions 16.1 We welcome the proposals in the Consultation Document and the Government's willingness to help us with our objective of achieving the best outcome for the BSPS membership We firmly believe that, if the only alternative is BSPS going into the PPF, the best outcome would be achieved by staying out of the PPF and modifying pension increases (revaluation and indexation) in the way we have proposed That is no reflection on the PPF, which we think is an important safety net for pension schemes. Rather, it is a reflection on the relatively good funding position of BSPS and its ability, using the assets it currently holds and adopting lower risk investment policies than the PPF's, to provide better benefits than PPF compensation with a much lower risk of future PPF entry than most other schemes We would urge the Government to help us to achieve this outcome for BSPS members in all scenarios that would otherwise require BSPS to go into a PPF assessment period. 15

16 16.5 For the particular reasons we have explained, allowing BSPS to stay out of the PPF with modified benefits would involve less risk and less cost to the PPF and its levy payers than immediate PPF entry We have a strong preference for the section 67 solution over the bulk transfer solution. The section 67 solution would be much quicker and would produce a more certain outcome. The bulk transfer solution has a number of problems including the windfall for High/Low pensioners, which would impose a 500m unfunded cost on the PPF We would wish to have an early opportunity to comment on any draft regulations The appendix sets out the specific questions in the Consultation Document and our summary responses. B.S. Pension Fund Trustee Limited Trustee of the British Steel Pension Scheme 16

17 Appendix SUMMARY OF RESPONSES TO QUESTIONS IN CONSULTATION DOCUMENT 1. Would existing regulatory levers be sufficient to achieve a good outcome for all concerned? We believe that the best outcome for members would require BSPS to stay out of the PPF so that its assets can be used to provide benefits that are better than PPF compensation for the vast majority of members. In order for that to happen, it is necessary for BSPS liabilities to be reduced so that BSPS is fullyfunded on a self-sufficiency basis. That can be done by reducing future pension increases in accordance with the special powers given specifically for that purpose in these circumstances. But section 67 is an obstacle, which is why we have asked for it to be disapplied specifically for BSPS in these exceptional circumstances. The alternative option of a bulk transfer is much less satisfactory for a number of reasons, including the need to find clear and certain solutions quickly. But, if the bulk transfer option can be made to work in the context of the TSUK situation, it will be necessary to allow members to be included in the bulk transfer without their consents (subject to appropriate safeguards) if we are to ensure the best outcomes for as many members as possible. Separation of BSPS from TSUK can be achieved within the existing statutory framework. If there is to be a Regulated Apportionment Arrangement, BSPS should end up no worse off than if there had been an insolvency of TSUK. The Pensions Regulator and the PPF should consider any RAA proposal having regard to the particular circumstances of BSPS. 2. Is it appropriate to make modifications of this type to members benefits in order to improve the sustainability of a pension scheme? Yes. It is appropriate for section 67 to be disapplied in the exceptional circumstances of BSPS if otherwise BSPS would go into the PPF. This would enable the vast majority of members to receive better benefits than PPF compensation. This would also be better for the PPF than immediate PPF entry. BSPS will be adopting lower risk investment policies than the PPF and, because it has negative PPF priority drift, staying out of the PPF for at least the next ten years would mean less cost and less risk for the PPF and for all other pension schemes that are required to fund the PPF through PPF levies. 3. Is there a case for disapplying the section 67 subsisting rights provisions for the BSPS in order to allow the scheme to reduce indexation and revaluation if it means that most (but not all) members would receive more than PPF levels of compensation? Yes. The vast majority of members would receive better benefits than PPF compensation. 17

18 No members would suffer a reduction in benefits and all members would have future pension increases at least as good as those provided by the PPF. Some members might have benefits that are less valuable than PPF compensation because of an anomaly in the way PPF is calculated that could give these members a windfall if BSPS goes into the PPF. These are mainly members who took early retirement and exercised the High/Low option. This gives them a higher pension before State Pension Age and a lower pension after SPA. If BSPS goes into the PPF before they reach SPA, their PPF compensation is based on their "High" pension (usually at the 90% level) but, if BSPS goes into the PPF after they have reached SPA, PPF compensation is based on the "Low" level (usually at the 100% level). It might therefore be better for these members to have PPF compensation instead of modified BSPS benefits. We see this as an anomaly in the design of PPF compensation. The cost of the extra benefits resulting from this anomaly would be roughly 500 million. If BSPS stays out of the PPF, we believe that High/Low pensions should be reduced at SPA in accordance with the terms agreed with those pensioners at retirement. Any alternative would result in an unintended windfall for this cohort. 4. Is there a case for making regulatory changes to allow trustees to transfer scheme members into a new successor scheme with reduced benefit entitlement without consent, in order to ensure they would receive better than PPF level benefits? Yes, subject to appropriate safeguards, it should be possible to make such a transfer. 5. How would a new scheme best be run and governed? The BSPS trustee would be involved in setting up the new scheme and we would, with support from the Pensions Regulator, ensure that it has an appropriate constitutional and governance framework. Existing legislation gives the Pensions Regulator sufficient powers to ensure that the new scheme has an appropriate trustee board that is able properly to discharge its statutory and fiduciary duties. 6. How might the Government best ensure that any surplus is used in the best interest of the scheme s members? The rules of the BSPS or a new scheme would preclude any payment of surplus to any employer or sponsor. Surplus could be used only to improve the security of members benefits or to reinstate pension increases. 7. What conditions need to be met to ensure that regulations achieve the objective of allowing TSUK to reduce the levels of indexation and revaluation payable on future payment of accrued pension in the BSPS without the need for member consent, balancing the need to ensure that member s rights are not unduly compromised? The conditions should be that: (1) the trustee reasonably believes that, if this action is not taken, the scheme is likely to enter a PPF assessment period within the next 12 months, 18

19 (2) the trustee agrees to the modifications, and (3) no surplus can be paid to any employer or sponsor. We expect that the Government would make regulations to disapply section 67 for BSPS only if it is satisfied (after consulting the Pensions Regulator) that BSPS would then have a very good prospect of successfully operating on a self-sufficiency basis, taking account of its funding position and investment policies and the characteristics of its sponsor. The regulations should be made in all circumstances where these conditions are satisfied, regardless of what happens to the TSUK business. 8. What conditions need to be met to ensure that regulations achieve the objective of allowing trustees to transfer members to a new scheme without the need for member consent, balancing the need to ensure that members rights are not unduly compromised? The conditions should be that: (1) the BSPS trustee reasonably believes that, if no transfer is made, BSPS is likely to enter a PPF assessment period within the next 12 months, (2) members may be transferred without their consents only if the trustee thinks that this is in their interests, on a balance of probabilities and on the basis of the information already held by the trustee, (3) members are not transferred without their consents unless the trustee has taken reasonable steps to give them a reasonable opportunity to opt out of the transfer, and (4) no surplus can be paid to any employer or sponsor of the new scheme. -ooo- 19