The government was warned by its own advisers about the multibillion-pound flaws of controversial pension “quick fix” to protect Tata steelworkers’ jobs at Port Talbot.
Confidential analysis prepared in June by the Government Actuary’s Department for ministers suggested proposals to hive off Tata’s pension scheme, in order to make the UK business more attractive to a buyer, were riskier than the plan’s proponents had asserted.
In May the government had launched a consultation on proposals to allow Tata’s pension scheme, in deficit at the time, to be run on a “standalone” basis, or without an employer sponsor — an unusual arrangement.
David Cameron, prime minister at the time, was unwilling to watch one of Britain’s totemic manufacturing industries go under and Sajid Javid, former business secretary, had been encouraged to find a solution to the crisis, however unconventional.
To enable this arrangement, the government proposed changing pension law. This would allow the British Steel Pension Scheme, which Tata had inherited, to make the £2.5bn in savings said to be needed for it to run on a self-sufficient basis, by cutting back on future pension increases for members.
When a consultation on this was launched, both Tata and the pension scheme trustees described the plan as “low risk”.
But unpublished analysis for government, dated two weeks after the consultation was launched, raised a number of reservations over whether the self-sufficiency proposal was low-risk for the scheme’s 130,000 members, many of whom would have been current or former workers at the Port Talbot steel plant.
“To eliminate most of the risk of the scheme being unable to meet its (reduced) liabilities in the absence of any sponsor support (ie self sufficiency) would require additional assets which we have estimated to be in the region of £3-£4bn,” said the GAD analysis, which was dated June 13 and has been seen by the Financial Times.
“In order to have a very high level of confidence at 31 March 2016 that the BSPS will provide the amended benefits in full, a very significant amount of additional funding would be required,” it added.
The 16-page report — prepared for the Department for Work and Pensions — also said that without a “viable sponsor” the BSPS could pose “significant risk” of falling into the pensions lifeboat fund, “with a materially larger deficit than at the current time”.
The analysis concluded that the proposal was “broadly consistent” with a “50:50 expectation” of being able to pay members’ benefits in full, with “no additional reserves to manage materialisation of risks in future”.
The BSPS, which encouraged its 130,000 members to support the proposal, told the FT that it had presented “updated” figures to government in July, after the consultation closed in June.
“We can categorically say that the Trustee of the British Steel Pension Scheme did not mislead members when stating that the proposal put to them was low risk,” said a spokesman for the Trustees.
“The Trustee has always had a high level of confidence that BSPS assets can be invested in a low-risk manner to deliver modified benefits as originally proposed, that this would present much lower risk to the PPF than many other schemes, and that this would be the best and fairest outcome for members. Nothing has happened to change that view.”
However, Steve Webb, former pension minister, said the flaws highlighted in the GAD report “fundamentally undermined” the consultation.
“The government should have commissioned this research before it began its rushed consultation, or should have extended the consultation to make sure that this vital information was put in the public domain as soon as possible,” said Mr Webb, now director of policy with Royal London.
“It was never a good idea to introduce rushed pensions legislation to try to solve a problem of industrial policy, and this analysis should lead the government to drop these proposals forthwith.”
The Department for Work and Pensions said it would be formally responding to the consultation in due course and “will not comment while the process is ongoing”.
However, a resolution to the pensions question is vital for Tata’s proposed merger of its European steelmaking operation with that of its German rival ThyssenKrupp.
Tata Steel said it “continues to responsibly develop options to identify the best prospects for the future sustainability of its UK operations and the best outcome for members of the British Steel Pension Scheme”.
The company is understood to be meeting unions this week to discuss pensions.
Mr Javid, who is now secretary of state for communities and local government, declined to comment.