Tata Steel's plan to close its defined benefit scheme to future accrual faces industrial action, leading some experts to call on trustees to give greater consideration to the sponsor covenant.
Large private sector scheme sponsors have taken decisive action over recent months as they battle to control soaring deficits in a low-yield environment.
In February, Tesco announced a consultation to curtail DB accrual, while more recently insurer Royal Sun Alliance reported its £7.6bn pension liability is preventing plans to sell off parts of the company, demonstrating the drag pension funds can have on their sponsor.
Tata Steel announced plans to close its DB section to future accrual last week following months of consultation with unions. The move has sparked threats of industrial action.
Whose covenant?
The Tata scenario throws up some interesting questions about the scheme’s employer covenant.
While Tata Steel is a UK company based in Port Talbot, Rotherham and Scunthorpe, it is 30 per cent owned by India-based Tata Group.
Lincoln Pensions' Darren Redmayne said: “What is the covenant standing behind this scheme – is it Tata Steel or is it in part the broader group within which the Tata scheme sits?”
A spokesperson from the company said in a statement: “We have been unable to come to an agreement that would have enabled defined benefit provision to continue.”
According to the scheme’s 2014 annual report, as at March 31 2013 the scheme recorded a deficit of £1.17bn with a 92 per cent funding level.
Following union consultations, Tata Steel closed its DB scheme to new members in 2014 and established a new defined contribution section – in which a 6 per cent employee contribution nets a 10 per cent employer contribution.
Roy Rickhuss, general secretary for trade union Community, said during Tata’s consultation in November the company had proposed a cap of 1-1.75 per cent on future increases in members’ pensionable pay and the withdrawal of the scheme’s early retirement provision, in an attempt to keep the DB section open.
“We were prepared to look at the cap on the basis that it was a safeguard,” said Rickhuss. “We did agree we would look at ways we could offset the deficit.”
However, Tata Steel said the proposal to change member benefits would have unfairly disadvantaged younger scheme members, who would have had to bear most of the impact of the changes.
It said in a press statement earlier this month: “The company believes a more balanced solution was necessary if the defined benefit scheme was to remain open.”
The union is balloting members over potential industrial action.
The company believes a more balanced solution was necessary if the defined benefit scheme was to remain open
Tata Steel
Business case
Darren Redmayne, managing director at employer covenant specialist Lincoln Pensions, said in the wake of the IBM High Court ruling, in which the court held that IBM’s actions in making scheme amendments amounted to a breach of good faith, the bar has been raised for employers to demonstrate “due process” when presenting the business case for scheme closure.
“That feedback also includes the potential for strike action and industrial relations issues – those issues have value,” he said.
However the Pensions Regulator's revised DB code, published last year, placed a greater emphasis on the strength of the sponsor alongside an appropriate funding plan.
Roger Mattingly, managing director at Pan Trustees, said the decision to make changes to the scheme must not be viewed in isolation by employers, trustees or members.
“It would be a shame if the reaction by members to this proposal was in itself damaging, without seeking to gain an understanding of the holistic picture,” he said.
“If by persevering with the DB scheme that severely damages the employer covenant that supports it... then as far as members and unions are concerned it may well be a price worth paying to accept the transition from DB to DC as a holistic proposal."
