In Depth

Tata Steel strikes £550m deal to solve pensions riddle

Agreement will clear path for company to merge UK assets with ThyssenKrupp of Germany

Why Brexit has hit Tata Steel rescue hopes

24 June

A historic vote for Brexit could endanger the hopes of saving 11,000 steel jobs, including 3,000 at the Port Talbot blast furnace, as Tata Steel reconsiders its future.

The Indian-owned firm put its UK assets up for sale in March and has already sold one business unit in Scunthorpe, although it had been rumoured in recent weeks that bosses could be leaning towards accepting government support to stay on.

However, a source speaking to the Financial Times said that was now in doubt following the results of the EU referendum. Leave’s shock win means the fate and cost of steel sales to Europe are in doubt, subject to a complex trade negotiation with the bloc.

Prior to the vote, Tata bosses had written to staff asking them to “consider” the benefits of membership of the EU, which is the firm’s largest trading partner and accounts for a third of exports.

There will now be “recalibration” by the board, the source said, adding: “This could change everything.”

Tata Steel’s shares slumped nine per cent in Mumbai this morning, which in terms of falls was second only to the 11 per cent decline for sister company Tata Motors, which also has a UK manufacturing presence in the form of carmaker Jaguar Land Rover.

The company’s official statement stated simply it is “committed to developing the best prospects possible for our UK operations”.

There has been much talk in recent months about the damage that will be wrought on communities if Tata’s operations are not preserved. In this context, it is worth noting that in all of the local authorities in which the company has sites, a majority of voters backed leaving the EU.

The most Eurosceptic of these was Hartlepool, where nearly 70 per cent backed Leave, while the least was Sheffield, where only a marginal 51 per cent voted Out. In the Neath Port Talbot poll, the Leave majority was 56 per cent.

It could be that those steelworkers agree with some of the arguments made earlier this year that EU state aid rules blocked the government offering more support and that more stringent tariffs on cheap Chinese steel imports could have been imposed.

If those claims - most vocally expressed by Nigel Farage - are correct, then the enthusiasm of either Tata or its buyers will be unruffled by the referendum result. Time will tell.

Tata Steel pensions: Has 'punchy' PPF response hit rescue sale?

22 June

A rescue sale of Tata Steel's remaining UK assets, which collectively employ 11,000 people, has been thrown into fresh doubt by the industry's pension lifeboat scheme.

Giving its official response to a consultation on controversial reforms to the £14bn British Steel pension scheme, which is underwritten by Tata, the Pension Protection Fund (PPF) has warned the proposals set a dangerous precedent, the BBC reports.

They also say it could force the PPF to cover an even bigger financial hit further down the line.

Tata's pension funds are £700m in deficit, or as much as £7.5bn on a worst-case buyout basis. The huge sums needed to fill the shortfall are one of the main reasons the Indian company wants to leave the UK, but they represent a huge barrier to a successful sale.

To counter this, the government has proposed hiving the schemes off into a separate holding company and re-indexing future payouts to a lower level of inflation. This would save £2.5bn in future liabilities and, the trustees say, make the funds sustainable over the longer term.

However, the PPF has said this amounts to reducing promised benefits and requires a change in law, which would set a precedent for other employers in a similar situation.

Consequently, it says there are "significant risks for relatively limited gains".

 As for separating off the company, it argues this would mean the PPF "directly underwriting the risk of the scheme's investment strategy failing". If this happened years down the line, the liability could have grown and would impose a much bigger strain on the rescue scheme.

The government should "seriously consider making any such scheme ineligible for PPF protection", it says, reports the Daily Telegraph.

Independent pensions expert John Ralfe said the response meant a sale of Tata’s UK business was now unlikely to take place.

"The PPF is against it - and the language is pretty punchy - and as they are the ones who will have to bail it out if it goes wrong, it is not going to happen," he said. "The government can’t just overrule the people with the most skin in the game."

Even if Tata decides to scrap the sale and stay on in the UK, as has been rumoured, it will want to find a solution to the pension deficit. This could ultimately mean the government having to step in to guarantee payouts to its 130,000 members.

Tata Steel 'courting bidders' for two of its UK divisions

21 June

Tata Steel appears to be abandoning its previous pledge to keep the whole of its UK business as a single operation, fuelling speculation it might hold on to the bulk of its assets.

The Financial Times reported yesterday that the company was now considering bids for parts of the business, something it initially rejected. Tata's Indian parent company was also said to be considering accepting government support and scrapping the sale altogether.

Adding to that, Sky News says today that "documents relating to the sale of Tata's speciality steels division and its pipeline tube operations… will be issued to potential bidders in the coming days".

The sales would involve breaking up Tata's UK operations, which several analysts believe will yield a greater overall value as separate businesses. Speciality steels and pipeline tube operations have been chosen because "they are separable from the main Tata Steel supply chain".

Tata may then decide to hold on to its remaining assets based around the Port Talbot blast furnace, which represents the largest chunk of its UK operations. In return, the government could take an equity stake in the company of up to 25 per cent and hand out hundreds of millions in taxpayer loans.

The speciality unit is "the world's third-largest manufacturer of steel for the aerospace industry", with customers including Rolls-Royce. It employs more than 2,000 people at two sites in Yorkshire.

Tata's pipeline tube business supplies products to the oil and gas industry and has a workforce of several hundred.

Seven bidders have been shortlisted for the entire business and a final decision is expected to be finalised next month. In the meantime, a consultation on the £14bn Tata-sponsored pension scheme closes on Thursday.

The restructuring of the British Steel pension scheme would clear a path to reduce the inflation increases to future payouts and save £2.5bn in liabilities, a critical element of a plan to hive off the fund in order to ease the burden on any prospective owner.

Tata Steel's future still hangs in balance

20 June

Tata Steel remains divided on whether to reverse its decision to leave the UK or go ahead with a sale – and it is also open to selling off its assets piecemeal in order to secure the best price.

Tata's Indian parent company said in March that it was leaving the UK, where its sprawling operations based around the Port Talbot blast furnaces are losing around £1m a day.

In the hopes of saving the thousands of jobs at risk, the government has made a series of offers to would-be buyers, but they also extend to the existing owner.

Among them is a pledge to take a 25 per cent stake in the company and to provide hundreds of millions of pounds in taxpayer loans to finance a turnaround. The government has also promised to find a solution to the £14bn British Steel pension schemes, which are in deficit to the tune of £700m.

A consultation on controversial changes to the pensions fund, which would allow trustees to link eventual payouts to a lower level of inflation, saving £2.5bn in liabilities, closes on Thursday.

The Daily Telegraph cites sources close to the firm as saying the board is now holding "daily" meetings with representatives at the Department for Business, Innovation and Skills "to establish the details of [these] headline pledges".

Tata has delayed a final decision on its future until July, although several industry experts believe it is more likely now to stay than to go. One source says the decision to leave was based on a management turnaround plan for the UK business being rejected and that a "very different plan would have to be put to the board".

If Tata does go sell, the government's preferred bidders are said to be JSW Steel of India and a joint offer from the UK private equity fund Endless and Wilbur Ross, a veteran US turnaround investor.

Both bidders are being backed "because of their financial positions", says the Financial Times, as the company and government seek assurances that the UK business would be kept open for a minimum of three years.

However, in another twist that will "further muddy the waters", another source told the FT Tata might now be considering bids that would split up its UK business to extract the best value.

Such offers would probably involve "facilities that are operationally separate" being hived off individually and the Port Talbot plant being sold as a rump asset, along with its range of related businesses. Several experts fear this could lead to the closure of the Welsh site, where Tata's losses are based.

This would mark a reversal for the company similar to a decision to scrap the sale. Until recently, it had refused to even consider bidders unwilling to take on its assets as a single going concern.

Tata Steel: Trustees back pension payout cuts

17 June

Trustees of the massive £14bn British Steel pension scheme have formally backed government proposals to curb future payouts, which they say amount to a better deal for its 130,000 members.According to The Times, the trustees' official response to the public consultation about the modified deal warns that 58,000 members under 65 could face a ten per cent cut to their pensions if the scheme were placed in the industry bailout fund.Under Payment Protection Fund (PPF) rules, members under retirement age are entitled to 90 per cent of their payout, subject to a cap of around £30,000.

Allan Johnston, the chair of the trustee board, says the "very large, well-funded" scheme would be a better option than the government's lifeboat, in spite of the proposed reduction in annual increases.

At the end of May, the government announced a 30-day consultation on a legal change to the scheme as part of its plan to help Tata Steel find a buyer for its UK businesses. The modifications would allow the fund to cut annual increases to the lowest rate of inflation in order to save around £2.5bn in liabilities.

The controversial proposal would breach a provision in pension law that states that schemes with a defined payout are not allowed to have their benefits reduced from what was promised when members' contributions were made.

The Times reports that Tata believes the legal change can be ring-fenced to its fund because its pension scheme documents state that benefits can be cut if they prove unaffordable. These terms were agreed in 1990, but the changes to pension law came later, in 1995.

Tata's pension scheme is currently running a funding deficit of £700m. The figure would rise to £7.5bn on a "worst-case" basis in the case of a buyout by a private provider.

Rescue bidders are unwilling to take on Tata's pension liabilities, making finding a solution an important step in the effort to save 11,000 jobs. It is now becoming a straight choice between the government's union-backed proposals and the PPF, with the added complication of the precedent that might be set for future pension schemes.

Tom McPhail, the head of retirement policy at Hargreaves Lansdown, told The Guardian the changes "may well be the right thing to do", but it "will be hard to ring-fence this decision".

However, he added: "In light of issues being raised in the context of the BHS pension scheme, there is a strong argument for a considered review of the pension scheme funding, of trustee responsibilities and of trade-offs between guarantees and costs in final salary pension schemes."

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