The £11.4bn scheme will close its defined benefit section to new entrants and introduce a money purchase scheme to manage the costs of auto-enrolment
From April 2014 new employees will be enrolled in a nursery DC arrangement. These members will be eligible for a defined benefit pension in future, depending on the scheme's financial health.
Schemes that open up a nursery scheme for new joiners can benefit from the following:
A transfer of risk from employers to members;
Lower contributions for the nursery scheme; and
A lower-cost governance arrangement for the nursery scheme, thereby reducing the employer’s ongoing charges.
Allan Johnston, chairman of trustees at British Steel, wrote in the scheme's annual report: "During the year, the company concluded consultations with employees and their representatives regarding changes to the BSPS for future service.
"[These are intended] to make the scheme more affordable and sustainable, and reduce the risks faced by the company."
The £11.4bn scheme has also reduced the rate of accrual from 1/60ths to 1/65ths, effective from April 2012.
As reported by schemeXpert.com in July, it has introduced a longevity factor to benefits coming into payment for service on and after April 1 2012.
The scheme has also agreed to establish top-up contributions for its members, a type of additional voluntary contribution calculated on a DC basis. This will also be housed in the new section.
Schemes that launch a nursery DC section for new entrants can reduce their investment, longevity and regulatory risk, while keeping an option to move members into the DB section further down the line.
How British Steel manages costs
When the DB section is closed to new entrants in April 2014, British Steel staff will be able to join the DC section.
If the DB scheme's funding position improves, it may be opened for members of the DC section to join.
"The target is for the value of the assets held by the scheme to be greater than or equal to 104 per cent of the liability value," said Marian Elliott, director at Spence & Partners.
If these targets are met and members are allowed to enter the DB scheme after April 2014, this will be on the basis of future accrual only. Benefits will not be backdated to when the scheme closed.
The unusual aspect of the British Steel arrangement, however, is that there is some chance of the DB scheme reopening to new entrants once the scheme is in better financial shape.
"It is far more common for schemes that close to new entrants to do so indefinitely," said Elliott.
Reducing costs in light of auto-enrolment
Nursery DC schemes are rare but employers tend to offer them when they have high levels of staff turnover or short-term workers.
The use of a nursery scheme is a way to target auto-enrolment spending
More employers are setting them up in the run-up to auto-enrolment, where companies want to maintain a DB scheme but do not wish to have to auto-enrol every new employer into it.
Britt Hoffmann, head of P-Solve UK DC, added: "The use of a nursery scheme, where contribution rates are lower, is a way where schemes can target [their auto-enrolment] spending."
Andrew Cheseldine, principal at LCP, said schemes introduce a nursery arrangement for new employees prior to them joining the main section of a scheme.
"Employers run these both to reduce the overall cost of benefits and to reduce the costs of administration," he said.
