It is the time of year when people’s attentions focus on their holidays, and summer is notorious for low recall of business news stories. This August is no exception. In most weeks this month, less than half of the population recalled any business stories.
Nonetheless, a few stories punch through into public consciousness. One of the most noticed is the long-running pension crisis at Tata Steel. Eighteen months ago the Indian conglomerate threatened to close its loss making UK Steel operations and cut thousands of jobs, unless a buyer could be found. None was found, but the Government began negotiations with Tata to keep its UK steelworks running, in exchange for a deal on the enormous pension obligations that Tata had inherited from British Steel.
This month one of the most noticed business stories was Tata’s announcement of a deal sanctioned by the Government, Pensions Regulator, the Pension Protection Fund and the unions, which would keep the furnaces burning in its iconic Port Talbot plant and save thousands of jobs.
Though subject to a 28-day period for legal challenges, the news has been widely welcomed as a resolution to the long-running negotiations.
The settlement involves a rarely used legal mechanism, called a regulated apportionment agreement (RAA), which allows an employer in financial difficulties to rid itself of defined-benefit pension liabilities. The agreement allows Tata to offload part of its £15bn pension scheme into the Pension Protection Fund, the Government’s lifeboat for failed pension schemes. Tata will then put the remaining portion of the scheme into a new defined-benefit scheme, but this scheme will have lower obligations than the original scheme.
Effectively, the RAA allows Tata to hand over responsibility for some of its pensioners to the Government and to reduce its obligations to the rest, in exchange for a £550m payment and a commitment to keep its UK operations going.
So, is the deal a good thing?
For current pensioners: not really. Whether they jump into the Government’s pension lifeboat or stay in Tata’s new scheme, their pension benefits will be eroded.
For current steelworkers: yes and no. They keep their jobs, but under either scheme their pension pay-outs are likely to be lower than under the original scheme.
For Tata: yes, mainly. It rids itself of the legacy pension scheme which has been a millstone around its UK steel business and gives itself a chance to turnaround a business being dragged-under by unsustainably large pension liabilities.
It also opens the door to a large cost-saving merger of its European Steel business with ThyssenKrupp. However, it still has to contend with a global steel market which is chronically oversupplied.
For the Government: in the short term, yes – but, in the long term, probably no. Now, the Government can claim a success in keeping a strategically important industry going and saving thousands of jobs.
However, the RAA deal has set a precedent – the Government is willing to accept some pensioners from large defined-benefit schemes into the Pension Protection Fund, in exchange for the company keeping the business going. This could become very expensive. The pension schemes of large UK businesses are so badly underfunded that, even if only a small proportion, offload some of their pensioners into the Pension Protection Fund, it would cost the Government tens, if not hundreds, of billions of pounds. This is more than the Pension Protection Fund could cope with.
So, expect to hear more about big companies seeking RAAs. If these are agreed, the Government will need to find a way to pay for a much bigger pension’s lifeboat.
This deal with Tata isn’t a long term solution, it’s pushing the pension problem further down-the-road and hoping that the economy picks-up enough to alleviate the largest pension deficits.
It’s a big reputational risk, but, right now, the Government doesn’t appear to have any other moves.