The DWP’s consultation looking at reducing member benefits in the British Steel Pension Scheme is driven primarily by politics rather than pensions says the Association of Consulting Actuaries.
The ACA says the need to respond to the crisis within the steel industry could lead to rushed changes to well-established pension legislation with the potential for adverse and as yet unforeseen consequences. But the ACA does feel that there should be further exploration of ways to provide for a mechanism for the estimated 600 to 1,000 DB schemes whose employers have such a weak covenant they are unlikely to able to deliver on their promises to amend benefits. The ACA says this is needed to offer a viable alternative to the trustees demanding cash and forcing an insolvency with the scheme ending up in the PPF.
ACA chairman Bob Scott says: “Our initial reaction is for any solution to be found within the current legislative framework. In particular, we suggest that consideration is given to setting up a new scheme with lesser benefits, transfer to which is with member consent and facilitated through a regulatory apportionment arrangement under which those that don’t transfer go into the Pension Protection Fund.
“Looking beyond the British Steel situation, we support moves to find an alternative to insolvency and PPF entry for the 600-1,000 DB schemes whose employers have such a weak covenant they are unlikely to able to deliver on their promises. This might continue to be the regulated apportionment arrangement, but we suggest this should be critically re-evaluated given concerns that the conditions that need to be met are too strict and the timescales too slow. It could be an alternative mechanism through which an appropriate compromise could be reached, so long as the revised benefits are at least as good as PPF compensation. In either case, a facility to switch from RPI to CPI is desirable given the current legal lottery.
“We would support a very narrow adjustment to section 67 of the Pensions Act 1995 to facilitate a reduction to benefits, but only for the BSPS, given the nature of its pension increase rule, and with no precedent established that this could be extended to other schemes.
“We are opposed at the current time for any adjustments to be made to the bulk transfer without consent legislation but any future changes should apply across the board, not restricted to large schemes.”
Aon Hewitt senior partner Kevin Wesbroom says: “Tata Steel is not alone nor even an extreme example of how a DB pension plan become a challenge to a sponsor’s business. The issue of increasing DB costs affects all sponsors of DB schemes. Any solutions should not be specific to Tata Steel but open to other schemes with distressed employers. Parliament will need to decide how it is going to ease the burden of DB provision for sponsors in distressed situations, and who will decide and how it will be decided which cases are relevant.
“The pensions industry is talking about reducing/removing the benefits of affected members without their consent – which has hitherto been legally prohibited except in the case of employer insolvency. Any changes should therefore be carefully considered and not a knee-jerk reaction to a specific situation. If legislation is changed to permit compromising benefits, then any such change should be honestly and transparently addressed. We should avoid devices such as scheme reconstructions as mechanisms that will lead to benefit compromise.
“If it is decided that it is right to change benefits, then we should ideally do this within the original scheme, after clear communication to members showing which benefits they are losing.”