Tata Steel has a £485 million problem hanging around its neck which the government is trying to remove
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Britain's Business Secretary Sajid Javid is holding top secret talks with unions and pensions trustees about protecting Tata Steel's pension plan, reports The Financial Times.
Those talks include plans to reduce the scheme's long-term liabilities by benchmarking it to the consumer price index (CPI) rather than the higher retail price index (RPI). This will shave an estimated £2.5 billion from costs going forward.
It's not clear yet how the government will protect the pensions scheme, the report says. It could either create a new shell company to protect it or the government could directly safeguard it. What Javid doesn't want is for the scheme to fall into the state-backed "Pensions Lifeboat", the Pension Protection Fund.
Tata Steel's pension scheme is worth £15 billion, with 133,000 members. But it faces a £485 million deficit in funding, according to the FT. Potential buyers are being put off by this huge funding shortfall, which they would be expected to plug unless the government can reach a compromise.
Indian conglomerate Tata put its loss-making UK steel business up for sale in March. While buyers have been found for some assets, if it can't find a buyer for the bulk of the business it is expected to close it. An estimated 15,000 UK jobs are on the line.
Tata has reportedly received 7 rescue bids but at least 2, Sanjeev Gupta's metals group Liberty House and a management buyout team, have explicitly said they do not want to take on the pensions liabilities. This is why the government is now desperately trying to find a way to lessen the burden in some way.
This is why the government is now desperately trying to find a way to cover it. The pensions help is just one of a number of measures the state is considering to encourage would-be buyers.
BHS, the department store chain that collapsed last month, faces a similar pension shortfall, with a deficit estimated at up to £300 million. However, this is in the process of being taken on by the Pension Protection Fund as buyers circle.
Both BHS and Tata Steel have problems with what's called defined benefit schemes. These are pension schemes where members are promised a certain level of payout once they retire. These are increasingly unworkable because people are living longer, meaning employers need to meet these payout levels for longer, and because interest rates are in the toilet, this makes earning the money to pay off the pensions all but impossible.
In a submission to a parliamentary inquiry on BHS, former pensions minister Steve Webb said there are "many hundreds of 'zombie' schemes" that have "no realistic chance of the pensions promises being met" because of the reasons listed above.
Other rescue bidders for Tata Steel include Greybull Capital, which has already bought part of Tata's UK steel business, and Leeds-based turnaround group Endless.