British Steel Pension Scheme – Sackers’ response to consultation

Background

The Department for Work and Pensions (DWP) is consulting on four options aimed at helping the British Steel Pension Scheme (BSPS) as part of a wider package of Government support for British steel, steel workers and affected localities. Whilst the Government makes clear that the BSPS is in an exceptional situation and is therefore looking to find a solution which will enable the continuation of the British Steel industry, the consultation puts forward certain proposals which are of interest to other DB schemes in a similar position.

In this response

• General comments
• Option 1: Use existing regulatory mechanisms to separate the BSPS
• Option 2: Payment of pension debts
• Option 3: Reduction of the BSPS liabilities through legislation
• Option 4: Transfer to a new scheme
• Wider issues

General comments

We understand that the main aims of this consultation are to protect the steel industry in Wales, maintain employment for steelworkers and maximise the benefits available to members of the BSPS. Given that the proposed changes to the pension scheme are part of a wider package of measures, we also understand the need to act quickly.

In our view, whilst the consultation gives rise to issues which are relevant to UK DB schemes generally, any immediate legislative changes should be limited to the BSPS. However, the BSPS case does flag up issues which are not restricted to the BSPS.

We would welcome a Government commitment to an urgent review of the operation of DB pension schemes generally (both in the private and public sector) with a view to working towards a system that is sufficiently flexible to protect pension scheme members, sponsoring employers / PPF levy payers and other employees, whilst seeking to achieve fairness between different stakeholders and generations. For a broad review of this type, enough time needs to be allowed to enable different options to be investigated in detail.

For the BSPS, if a solution is found that does not involve immediate entry into the PPF, it will be essential to ensure that the BSPS’s eligibility for the PPF is maintained. In addition, should the BSPS be separated from its sponsor, we suggest that a professional independent trustee is appointed to the board, to help manage the transition and ensure the smooth operation of the scheme going forward.

Option 1: Use existing regulatory mechanisms to separate the BSPS

Existing regulatory levers are available to the BSPS, as they are for any other scheme, and we believe that it would be possible to achieve a regulated apportionment for the BSPS within the existing statutory framework.

Option 2: Payment of pension debts

From the Government’s comments in the consultation in relation to option 2, we understand that this option is not a viable one for the BSPS. On this basis, we do not comment on its workability.

Option 3: Reduction of the BSPS liabilities through legislation

We note that this is the preferred option of the BSPS trustees, as outlined in their response to the consultation,  on the basis that this potential solution would be quicker and produce a more certain outcome for the scheme than the other options.

The consultation asks whether it is appropriate to reduce indexation and revaluation, on the future payment of accrued pension rights within the BSPS, in order to improve the sustainability of the scheme. We do not seek to comment on Government policy, but make the following observation:  Such an option has the potential to improve sustainability for the BSPS, and were it to be extended in the future beyond the BSPS, for any DB scheme.  It would not offer a guarantee as to the scheme’s longevity, but we envisage there will be situations in which being able to reduce indexation and revaluation will result in better outcomes for members overall.

The consultation also asks whether there is a case for disapplying section 67 to allow for the reduction of revaluation and indexation. Again, such an option has the potential to help the BSPS and other schemes.  If such a measure were to be introduced consideration would need to be given to putting in place adequate safeguards.  However, it seems to us that, in principle, there may well be situations where members are better protected in the long-term by trustees and sponsors being able to restructure scheme liabilities.

The consultation notes that “there are some BSPS members who would be better off in the PPF than they would be under the trustees’ proposal for reduced indexation and revaluation levels”. We understand that this refers to members with “high/low” bridging pensions.  These members could be better off in the PPF because of a quirk in the PPF compensation rules which might be viewed as an unexpected windfall.  This can give trustees difficulties when assessing what course of action is in members’ interests, but could presumably be resolved by changing existing PPF legislation.

Paragraph 109 notes that the regulations would require the BSPS trustees to agree unanimously that the changes to indexation and revaluation would be in the best interests of members. Pension scheme trustees are subject to general trust law duties in relation to pension schemes and we are unsure how this “best interest” test is intended to sit alongside these duties.  In our view, it is likely to be more appropriate to allow general trust law duties to apply rather than introducing a separate statutory test with unclear scope.  For example, how would this test apply when, as noted, some members may be better off going into the PPF because of the “high/low” bridging pension anomaly in PPF compensation? Acting in the “best interests” of members is commonly used as shorthand for describing a trustee’s duties, but pension lawyers generally consider this to be an oversimplification of the true position under trust law.  See, for example, Asplin J’s judgment in the High Court case of Re. Merchant Navy Ratings Pension Fund [2015] EWHC 448 (Ch).  Unless the Government has a clear idea of what test it is seeking to apply and how it would apply in relation to the BSPS, we suggest it may be preferable to leave the BSPS trustees’ decision to the general requirements of trust law.

Certain preconditions for any regulations are proposed, including an independent assessment of the scheme’s funding following the 2016 valuation. It is unclear who the DWP envisages making this assessment and for what purpose.

Option 4: Transfer to a new scheme

As we explain in our “general comments”, we agree that there is a need to address the issues raised by this consultation for the wider DB universe – but as part of a separate detailed review. Whichever option is chosen in relation to the BSPS, given the short timeframe involved, in our view it would be preferable for it to be limited in its application to the BSPS, rather than rushed through for all schemes.  If, however, the Government does decide to proceed with option 4 on the basis that it should apply more widely, we have the following comments from a legal perspective.

We recognise the practical difficulties in obtaining consents from large numbers of members. That said, we do not see the merit in applying an arbitrary cut-off point of 100,000 members.  Even for small schemes it is highly unlikely in practice that it will be possible to get consent from all members as it is common to be missing addresses for deferred members (and some members will not have legal capacity to give consent).  If the justification for amending legislation is that it is not possible to get consent from all members, we believe that this applies to almost all schemes of more than a very small number of members, and do not see the rationale for a 100,000 member cut-off point.

One of the safeguards proposed in relation to option 4 is that trustees would only be able to transfer a member if they considered it to be in the individual “member’s best interests”. This goes beyond the test for transfers without consent under The Occupational Pension Schemes (Preservation of Benefit) Regulations 1991 (SI 1991/167) (the Preservation Regulations).  In our view, it would be impracticable for virtually any trustee board, let alone the board of a scheme the size of the BSPS, to make an assessment in relation to each individual, as to whether a transfer would be in their individual best interests.  Such an assessment will depend on many factors, including life expectancy and whether survivors’ benefits are due.  (See also our comments on option 3 regarding a “best interests” test.) As such, we consider that any such protection, if put in legislation at all, should be offered at scheme level, based on the interests of the scheme members as a whole.

We assume the opt-out facility is desirable if members may be better off in the PPF as this allows members to choose that alternative (eg the high/low pension members). However, we do not believe that an opt-out facility should necessarily be required by legislation in every circumstance, for example, should it be necessary if the receiving scheme promises benefits that are at least as good as PPF compensation in every case?

Paragraph 150 sets out proposed conditions for a transfer to a new scheme. These include that:

• (ii) – the trustees notified the member and the member does not object. The trustees cannot be required to have notified all members, only to have attempted to do so. Scheme will not have current addresses for all members (indeed, despite best efforts, sometimes the records may have no address) and so they will not be able to satisfy a requirement to have notified all members;
• (iv) – the only difference in benefits offered by the new scheme should relate to lower indexation and revaluation requirements. This looks unduly restrictive (and dictated by the circumstances of the BSPS). A requirement to ensure that benefits are better overall than PPF compensation may be an alternative. Although this would potentially allow larger cut backs to pensions, this may be desirable to make the scheme in question sustainable;
• (v) – the transferring scheme transfers the unreduced cash equivalent transfer value (CETV) for each member who is transferred. In our view, this is incorrect. If a scheme is underfunded, and could only pay reduced CETVs, the actual CETV level should apply. If the scheme is in surplus on a CETV basis, in our view a share of fund basis should be applied. What exactly is intended here and why is this necessary? In practice, we consider that many schemes are unlikely to be able to satisfy the requirement.

We note the need to make regulations in order to permit the transfer of members to a new scheme which offers benefits at a lower level. If intending the regulation to have effect beyond the BSPS, the legislative position on introducing a scheme rule to make transfers without consent should also be clarified. At present, it is unclear whether regulation 3(e) of the Occupational Pension Schemes (Modification of Schemes) Regulation 2006 (SI 2006/759) means that such a rule, where one is not already in the rules, can only be introduced for members who leave pensionable service before their normal pension age and so have “short service benefit”, and would be subject to the conditions in the Preservation Regulations, which only apply to members with short service benefit.

In practice, trustees may well wish to transfer those with long service benefit as well, so it should be clear that introducing a scheme rule to do this is permitted (and the conditions for doing so). This should cover any new ability to transfer to a scheme which provides lower benefits and also expressly cover all transfers of long service benefits without consent, so that the legislation is clearer.

Wider issues

Whilst the current situation for the British steel industry raises issues that are particular to this industry and affected localities, as noted above, the issues facing the BSPS are not unique to that scheme. Therefore, although we recognise the need to act quickly in relation to the BSPS, with a view to enabling other schemes and their sponsors navigate similar situations in future, we would welcome a separate review of many of the issues that the present consultation highlights and which have been flagged to DWP in the past.

PPF long-service compensation cap

Introduced by the Pensions Act 2014 but not yet in force, the long service cap would provide higher levels of compensation to individuals with more than 20 years’ service. As the consultation notes, 85% of the BSPS members who would be affected by the cap would benefit from the introduction of the long service cap.  Although the Government’s commitment to the introduction of the long service cap was reiterated in February this year (in a response to a written question in the House of Commons) we are not aware of further action being taken to bring the relevant provisions into force.  In the interest of members who will benefit from this measure once in force, we would welcome its introduction without further delay.

Contracting-out regulations

As the DWP is already aware, the inability to transfer formerly contracted-out benefits to a scheme which has never been contracted-out is a wider issue. We welcome the fact that this is on the DWP’s radar and will welcome regulations to deal with the issue, irrespective of what decisions are taken on the BSPS, as this issue is causing considerable problems in practice.