Tata Steel has made headlines over the last week with news of a deal ‘in principle,’ which could put an end to their long-fought pensions debacle. The Indian-owned company has been embroiled in a debate over their defined benefit pension scheme for UK workers, and their inability to fund the scheme. In this article, we’re looking into the challenges faced by Tata Steel, the paths that led to them and the proposed resolutions currently on the table.
Tata Steel took on the scheme back in 2007, when they acquired Corus for £6.2 bn. However, the struggle to fund it has been an ever-present spectre since. In recent years, the inability to fund the deficit has become all the more serious, almost causing the firm to go bust. It has also been cited as the main stumbling block in a proposed merger between Tata Steel and German competitor Thyssen Krupp.
What is a Defined Benefit Pension Scheme?
There was a time when defined benefit pension schemes were one of the most efficient ways to remain competitive in your chosen sector. Many companies were under pressure to provide the same pension benefits as competitors.
A defined benefit pension scheme offers a secure income for life after retirement. This income also increases year on year. As you can imagine, they are very much sought after. They are also very costly to maintain, as Tata Steel discovered to their detriment.
Secure incomes can be calculated in a few different ways. Some companies consider your final salary at time of retirement, others will take a career average. The length of time that you have been a member of the scheme is also taken into consideration, as is the proportion of your earnings that you’ll receive as a pension for each year that you have been a member. This is usually 1/60th or even 1/80th. When we consider the case of an employee with 40 years’ service and likely another 20 years to live, we can see how this becomes very costly to the organisation. The liability for maintaining this pension also falls on the side of the organisation.
Tata Steel & Near Bankruptcy
In the case of Tata Steel, the above pension scheme became so costly to the company that it threatened to go bust. Pension contributions are protected and therefore could never be used by Tata Steel to fund deficits in other areas of the business. One only has to look at the case of BHS to understand how dipping into pension funds can be a catastrophic idea.
Unable to continue to fund the scheme, Tata Steel appealed to the Pensions Regulator. The Pensions Protection Fund soon also became involved. Together, they have conducted talks to strike a deal which will allow Tata Steel to continue to operate and appease the unions who have rallied to protect the pension funds of its members. Community, Unite and the GMB have been vocal about their pledge to hold the company to their commitment to their employees.
The Deal in Principle
On the 16th May, it was announced that Tata Steel had agreed a deal in principle with all parties involved. The deal states that Tata Steel will pay £550m into the British Steel pension scheme and will transfer the scheme a 33% stake in its UK business. This would then give current Tata Steel pension members the option of transferring into a scheme with the PPF, which would involve taking a 10% in their benefits or transferring to the new deal ironed out with the British Steel Pension Scheme. Unions have stated that in 2016, when they backed plans for Tata to turn around its pension plans, it did so under the assurance that its members would be given a choice. They have openly stated that they will hold the organisation to this promise.
If the deal is finalised, it will absolve Tata Steel from further liability towards the pension scheme and will remove the final barrier to its merger with ThyssenKrupp. Pensions are a near-constant issue in today’s headlines, yet it has been noted that around two thirds of people over 55 in the UK are still confused by current pension rules. We endeavour to help people become more in control of their finances and look to a long-term plan for financial security, of which considering pension options is a part. If you wish to discuss your pension or your financial plan, our experts are always available. You can set up an appointment via our contact us page.