Tata Steel offers new approach for distressed business pension schemes | Fieldfisher
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Tata Steel offers new approach for distressed business pension schemes


United Kingdom

The cost of plugging pension scheme deficits can be a contributing factor to a business becoming distressed. We take a look at two recent business rescue attempts.

Plugging a pension scheme deficit can be a contributing factor to a business becoming distressed.  Two recent business rescue attempts show how reducing pension increases has become a key area for trying to ease funding strain on distressed businesses and providing members with greater than PPF-level benefits.

Halcrow Group

The High Court has ruled recently on a pension restructuring proposal for Halcrow Group, aimed at avoiding Halcrow becoming insolvent and its scheme going into the PPF.  The proposal, supported by the scheme's trustees, involved reducing the scheme's deficit by transferring all members to a new pension scheme, with lower, statutory minimum pension increases.  Because of commercial sensitivities, requiring Halcrow's financial position to be kept confidential, the plan was to transfer members without their agreement.  Regulations meant that the transfer could go ahead only if the scheme actuary signed-off that benefits in the new scheme were broadly no less favourable than in the existing scheme.

The court ruled that in deciding whether to give the sign-off, the scheme actuary could take into account only the promised level of benefits under the schemes.  He could not take into account that benefits might be more secure under the new scheme or, that members might receive lower benefits under the current scheme if it were wound up or Halcrow became insolvent and the scheme was transferred to the PPF.  As the headline benefits in the new scheme were less generous than those in the current scheme, the actuary could not sign-off on the transfer.  Halcrow and the scheme's trustees are now attempting to persuade sufficient members to agree to a transfer. 

Tata Steel

Tata's pension problems are of a different financial and political order to Halcrow's – a scheme with 130,000 members and a £7.5 billion buy-out deficit.  

With the aim of trying to provide above PPF-level benefits, the Government is consulting on two possible legislative changes.  The first, which would apply only to the Tata scheme, would ease the restriction on reducing members' accrued benefits by allowing pension increases to be rebased from RPI to CPI.  The second, which would apply to all large schemes (100,000 or more members), would allow what Halcrow wanted to do and the transfer of members to a new scheme providing lower increases.  Member agreement to the transfer of their benefits would not be needed, although, unlike under the first proposed change, members would be able to opt-out of the transfer and effectively choose to receive PPF level benefits.


It is sensible to explore whether regulations can be made more flexible to facilitate the rescue of large schemes.  Adequate safeguards, however, need to be in place to prevent abuse and ensure that benefits can be reduced only where this is essential to an employer's survival and members have a genuine prospect of receiving benefits which are higher than those in the PPF.  These should include Pensions Regulator approval.  Protections are also needed for the PPF and levy payers who will effectively be underwriting the rescued scheme's investment and longevity risks and be exposed to potentially expensive priority drift - members moving into the higher pensioner level bracket of compensation.

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