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

Tata Steel accused of 'brinkmanship' over UK exit

31 May

Tata Steel's Indian parent company has been accused of "brinkmanship" designed purely to "get concessions out of the government", reports the Daily Mail, as speculation mounts that it could pull a sale of its main UK assets.

Having apparently caught ministers on the hop with March's announcement that it was pulling out of the UK, following years of sales rumours, Tata has been working with the government on a bidding process to secure a rescue deal.

As many as seven offers may have been submitted for the businesses based around the Port Talbot blast furnaces, which collectively account for more than 11,000 jobs.

But in attempting to solve some of the company's "unique" problems by offering cheap loans to fund a turnaround and to tweak the law to reduce the burden of its £15bn pension schemes, there are reports the government might have put together a package that would convince Tata to stay.

This would bring short-term job security and be touted as a victory by Business Secretary Sajid Javid.

Others, however, are not convinced.

"Several potential buyers are now said to have dropped out after it was claimed Tata demanded that any new owner pays off a £900m intra-company loan," The Mail says. This has fuelled claims that the company always wanted to stay on and is engaged in "a game of brinkmanship to get concessions out of the government".

Labour MP Stephen Kinnock, whose Aberavon constituency is home to the Port Talbot plants, told the BBC he would welcome "in principle" a decision by Tata not to sell, but that workers needed to be offered "guarantees" on the company's long-term commitment.

"[Steelworkers] in my constituency, their families and communities around them have been through hell in the last few years and certainly since March, when the sale was announced," he said. "I think they'll be forgiven for treating any news that Tata is staying on board with a degree of scepticism and even anger.

"So I think we need a very clear set of guarantees from Tata that they will be in it for the long run, that there will be investment and they will be doing what's needed so we're not back at square one 12 months from now."

Tata announced losses of £326m for the fourth quarter of the last financial year as it continued to write down the value of its European businesses, which have been hit by falling steel prices and a flood of imports from China. However, this was an improvement on a loss of £576m for the same period last year, notes Bloomberg.

While the future of one part of the UK business hangs in the balance, Tata could complete as soon as tomorrow a sale of the long products division based around its plant in Scunthorpe that employs 3,000 people.

Sources told Sky News a £400m financing package is fully in place, with all of the funds coming from private sources, meaning a mooted £100m loan from the government will not be needed.

Tata pension cuts: A 'dangerous precedent' or a 'blessing'?

27 May

As had been widely expected, the government yesterday announced a consultation that would allow changes to future pension payouts from Tata Steel's pension schemes.

It's a controversial move. Some believe it sets a "dangerous precedent", while others argue it is necessary to save 11,000 jobs and a company that represents the last stronghold of steelmaking in the UK.

What is the problem?

The £15bn British Steel final salary pension funds are a major barrier to securing a rescue deal for Tata's UK assets – or even persuading the Indian conglomerate not to exit the UK at all. More than 11,000 jobs are at risk, as well as tens of thousands more in related industries.

Department for Works and Pensions figures yesterday revealed the situation is financially much worse than had been thought. The funds have a shortfall of £700m to meet ongoing liabilities, much more than the regularly quoted £485m. To get a private insurer to buy the scheme would cost £1.5bn or, on a worst-case basis, as much as £7.5bn.

Tata is believed to be pumping in £35m a year to the schemes, but this would need to rise substantially just to maintain the status quo. No buyer is willing to shoulder the burden.

What is the new plan?

"Under the government's plan, drawn up with trustees, the scheme would be spun off into a new financial vehicle and benchmarked against the consumer price index (CPI) rather than the retail price index (RPI)," says The Guardian.

Put simply, uprating pensions in line with a lower measure of inflation would save as much as £2.5bn in future liabilities. Allan Johnson, the chairman of Tata's pension trustees board, says this will make the schemes affordable over the longer term.

But the proposal also requires a change to the 1995 Pensions Act, which forbids trustees from reducing payouts promised to members. It's this that has some experts worried.

Why are they concerned?

Business Secretary Sajid Javid believes the law will only relate to the Tata schemes and their "unique" situation. However, others aren't so sure.

Pension consultant John Ralfe told the Daily Telegraph: "This is the most extraordinary government document I have ever read. It is telling us that ministers are willing to change the law for one particular company in one particular set of circumstances."

Angela Eagle, the shadow business secretary, said the plans "risk setting a very worrying precedent" for other companies with a defined benefit scheme in deficit, a point supported by former pensions minister Steve Webb.

"Government would try to argue this was a special case, but rushed legislation as this always has a danger of a loophole," he said.

Apart from the government and Tata, is anyone else in favour of this?

Yes, quite a lot of people, actually. Most surprisingly, the plan has the backing of unions in order to save all those jobs – and because if the company fails and the schemes are placed into the Pension Protection Fund, then all ongoing and future pensions for those members below retirement age would be cut by ten per cent.

"It is important that all stakeholders continue to explore all available options that avoid the need for the scheme to go into the PPF, which would be the worst deal for scheme members," Community, Unite and GMB unions said in a joint statement.

What about those wider consequences?

Unions were at pains to point out that the government must be careful how it drafts the law changes. "We need to ensure that there are cast iron safeguards in place so this unique situation does not result in employers dodging their pensions responsibilities," they said.

But there are some who believe a precedent could be positive in cases such as this, where the alternative is dumping members into the PPF and losing out on even more benefits, and might even help to fix some broader issues with pension saving.

While "the potential deal on British Steel could rip a hole in one of the most fundamental principles of pension provision", it could also "be a blessing in disguise", Tom McPhail, the head of retirement policy at financial adviser Hargreaves Lansdown, said.

He added: "Some final salary schemes have become unsustainably expensive. The bulk of employer pension funding is being used to prop up these schemes, at the expense of younger employees in defined contribution pensions. A review of how we treat final salary guarantees could ultimately unlock better long-term pension provision."

When will it all be resolved?

The consultation is open until the 23 June, the same day as the EU referendum, after which Tata is expected to say which bid it has accepted - or whether it has decided to stay on after all.

Steel crisis: Tata might not dump its UK assets after all

27 May

Tata Steel's ongoing sale process for its stricken UK plants has been "thrown into confusion", says The Times, after rumours emerged that it might not dump its assets after all.

The company's Indian parent announced its shock exit from the UK, where it is losing £1m every day, in March. However, since then, the government, under pressure from campaigners, has offered "a deal so attractive" to prospective buyers that Tata might hang on.

In fact, The Guardian reckons that during talks in Mumbai to review up to seven rescue bids, Business Secretary Sajid Javid directly "asked [Tata] to consider keeping the business".

Executive director Koushik Chatterjee refused to rule out hanging on to the assets. Asked by reporters if this was now an option, he said: "Let's focus on the sales process. Let’s see where we get to."

The government has offered to provide funding and take a minority stake of up to 25 per cent in any buyout, as well as provide low-rate commercial loans to fund turnaround plans.

More crucially, it is set to launch a consultation today on changes to pension law that would allow payments on the Tata-underwritten £14bn British Steel pension schemes to be "re-indexed" to a lower level of inflation, saving as much as £2.5bn in future liabilities.

"Tata is unwilling to retain any liabilities in the British Steel pensions scheme and no buyer wants to take them on," says the Times.

Under the rumoured plan, Tata would provide a one-off sum and the schemes would be hived off into a separate company.

An alternative option would see the pensions placed in the industry rescue scheme, the Pension Protection Fund. If this were to happen, cuts to payouts would be more "acute", reports the Financial Times, with immediate drops of ten per cent for members who retired early and a cap on total payouts for everyone.

For this reason – and with 12,000 jobs at threat - unions are said to be supportive of the law change. Roy Rickhuss, the general secretary of Community union, said it would review the proposals to ensure "any change in the law… would not have an adverse impact on other pension schemes".

Public sector pensions were shifted to the lower rate of inflation in 2010. Unions at that time launched a legal challenge against the changes that proved unsuccessful.

Tom McPhail, the head of pensions research at Hargreaves Lansdown, told the Times: "This is the one thing you don't touch with pensions… It really would open up a Pandora's box.

"Yet this might be a blessing in disguise because something has to give," he added. "If there were a way in which pension benefits could be changed [for companies with unsustainable deficits], British industry might be able to move on."

Steel crisis: Tie-up could save Tata's Port Talbot works

24 May

A widely reported tie-up between two of the main bidders for Tata Steel's UK assets could mean the shelving of a frontline proposal to shut down the blast furnaces at Port Talbot. The fate of the plant, which employs 4,000 people, had become a contentious issue after one of the main white-knight bidders argued the furnaces should be shut down to return the business to profit.Liberty House, which has been amassing steel industry assets, including two Tata mills in Scotland, proposed converting the plant to use electric arc furnaces to produce finished steel from UK scrap.Unions and campaigners are fiercely opposed to the idea, which would spell the end of "primary" steel-making in the UK, and argue that the plan would eventually mean significant job losses among Port Talbot's thousands of specially skilled staff.In recent days, though, it has become apparent that Liberty House is preparing to work in partnership with one of the other bidders for the site, Excalibur, which is led by Port Talbot management and has been adamant that the blast furnaces would stay.Now it seems Liberty has been convinced."It is understood that [Liberty] has come round to the idea of saving much of the 4,000-strong workforce at Port Talbot by keeping the blast furnaces running, optimising them, taking an investment decision on whether to upgrade them and in any case beginning plans to install an electric arc furnace," reports The Times.Although the two groups are thought to have submitted separate bids, they are said to be keen for their offers to be seen as complementary and a viable alternative to proposals from private equity or overseas investors."It is not a joint venture, it is not a joint bid, but they are looking at a proposition," a source said. "It would be important for them to be seen together as the alternative… as the UK industry bid."In all, seven bidders are thought to have submitted a buyout proposal. The Financial Times reckons these will be whittled down to a shortlist of "two of three" at a meeting of the Tata board in Mumbai this week, which will be attended by Business Secretary Sajid Javid.The fate of the £15bn pension schemes underwritten by Tata Steel UK remains a key concern, with wrangling over a rumoured plan to split off the schemes into a separate firm and limit future payouts ongoing within government.

Steel crisis: Pensions split hangs over Tata deadline

23 May

The pensions of more than 130,000 members of retirement funds underwritten by Tata Steel UK are in the balance, as the deadline for rescue bids for the business looms.

Seven prospective buyers, which employ around 12,000 people at sites across the UK, are expected to put forward an offer by the end of the day. The BBC even reports that two of them, Liberty House and a management buyout consortium going under the name Excalibur, will state they are prepared to "work in partnership on a takeover".

It is not known how this would affect their respective turnaround plans. Liberty plans a radical conversion of the Port Talbot blast furnace into an electric plant processing scrap steel, while Excalibur has pledged to retain primary steelmaking.

Business Secretary Sajid Javid is flying to Mumbai this week to discuss the offers with the Tata board, says the Daily Telegraph. Beyond the specifics of the rescue plans in each offer, attention is likely to be focused on finding a solution to the near-£500m pension scheme deficit that has the potential to scupper a sale.

Buyers are unwilling to take on the huge £15bn British Steel pension funds, which the Daily Mail has estimated will require additional annual funding of £60m from next year - on top of the existing £485m shortfall and losses of £1m a day running the business.

Javid is thought to be backing a rescue plan that would see the funds hived off into a separate company, underwritten by the government and boosted by a one-off payment from Tata. Future pensions would be re-indexed to a lower inflation measure to "build a 'war chest' of £1.5bn to £2bn… to execute a buyout of the scheme" at some point.

However, this would involve a change to the law, which experts and the Department for Works and Pensions worry will set a dangerous precedent.

Their alternative solution is to place the funds into the industry rescue scheme, the Payment Protection Fund. This would also see future payments cut to the lower inflation measure only without the need for new legislation. It would also mean payments for a number of members who took early retirement being cut by up to ten per cent.

In a joint statement, the Department for Business, Innovation & Skills and the Department for Work and Pensions said: "We are working very closely together to achieve the best result for Tata workers and a future for British steel."

A spokesman for Tata said the company was "in talks with the government and pension scheme trustees to find a solution for the scheme".

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