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Article | Corporate and Trustee Briefing

How the British Steel Pension Scheme forged a new path

Pensions Corporate Consulting|Pension Board and Trustee Consulting
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By Gareth Oxtoby , Hazel Kendrick and Allan Johnston | September 14, 2018

In this article, we explore the background of what happened at British Steel and look at how we helped them on their journey to forge a new path in a short space of time. We also reveal some of the lessons learnt, which may apply more widely to schemes in stressed situations.

At the start of the millennium, the British Steel Pension Scheme’s (BSPS's) current situation would have been very hard to imagine. The scheme was well funded and well run, with strong support from both the employer and scheme members. Prior to its 2011 valuation the scheme had been in surplus on a technical provisions basis and it remained open to new entrants until March 2014. With the support of its sponsor, the trustee had undertaken a programme of significant de-risking of the investment portfolio with further work underway.

Downturn

An unprecedented downturn in the steel industry combined with challenging market conditions facing defined benefit (DB) schemes and their sponsors meant however that the scheme could not continue in its current form and the priority for the trustee was to secure the best possible outcomes for scheme members.

“Although its acquisition by Tata Steel in 2007 meant Corus Group was now part of a large and successful global steel producer, the trustee was keenly aware that the scheme's legal covenant was provided by the UK Company and not the wider group,” explained Allan Johnston, chair of the BSPS.

Even before Tata Steel acquired Corus Group, the trustee had appointed independent expert advisers to look at how the covenant might be affected by a takeover. The trustee was thus well prepared to negotiate with Tata Steel and the other bidders, and the security package ultimately agreed was an important part of the overall covenant provided to the scheme post-acquisition.

Fast forward

Fast forward and the scheme’s 2014 valuation showed it to be in a reasonably good position: funded to the tune of 99%, with a £90 million residual deficit relative to a scheme worth over £12 billion. However, by March 2016 the position had deteriorated somewhat, recalled Willis Towers Watson’s Gareth Oxtoby. “It was a scheme that remained reasonably well funded on an ongoing basis, but the challenges facing the steel industry meant that the covenant was clearly under threat. Taking into account changes in investment market conditions the deficit was then along the lines of £300 million, but if a weakening covenant was also reflected in a more cautious approach to determining the scheme’s liabilities, it was more of the order of £1 billion plus. Things had changed reasonably quickly.”

Johnston, with his 30 years’ experience in the steel industry, alongside his fellow trustees, had anticipated difficulties because of his deep understanding of the cyclical nature of the steel industry. In March 2016, the parent company announced that it would not fund the transformation plans in the UK and that a restructuring of the European business was required that might include a sale of the UK business. “Tata Steel bought Corus Group at the peak of the last cycle, before the downturn in 2008,” said Johnston. “Ever since then, the business – particularly the UK part – had required significant cash support and represented a drain on the performance of the group as a whole."

Innovative backdrop

The trustee had supported the sponsor and employee representatives in taking steps to try and keep the scheme affordable and sustainable. “A lot of innovative work had been done including caps on pensionable earnings growth and the introduction of a longevity adjustment factor however the mature nature of the scheme with around 70% of liabilities attributable to pensions in payment meant that changes which impacted employee members could only have limited effect,” recalled Johnston.

RPI vs CPI

An option which could have materially improved the position would have been changing the basis on which accrued benefits were increased (that is, moving from using the Retail Prices Index [RPI] to the Consumer Prices Index [CPI]) – Johnston estimated this could have reduced the value placed on liabilities by over one billion pounds. But RPI had been ‘hard-wired’ into the scheme rules, he recalled. “The trustee had been keeping this possibility under review for a number of years and we know that separately the sponsor had taken its own advice. Whilst some schemes had been able to change the basis of pension increases, the drafting of the BSPS Rules meant that there was very little possibility that the courts would agree to a change unless there was a change in legislation to permit it.”

When no purchaser could be found for the UK business willing to take on the scheme as well, the parent continued to provide support so that other solutions could be explored. This allowed the trustee, the sponsor and the various regulatory bodies time to look at how best to avoid an insolvency of the UK business and to deliver best outcomes for scheme members.

Figure 1. The pathway to a new scheme

Chart showing the pathway to a new scheme

A new scheme

Johnston noted that whilst the trustee recognised that the Pension Protection Fund (PPF) was an important safeguard for pension schemes generally, it believed that the BSPS had sufficient assets to offer members the potential for better outcomes.

“Having recognised that the current legal framework limited the scope for action, we felt we needed to go and talk to government,” recalled Johnston.

There were specific provisions within the scheme rules which allowed pension increases to be limited in certain circumstances, but they were overwritten by later statutory protections. Johnston commented that whilst the government had recognised that modifying the legislation could provide a better outcome for members, it felt unable to do so on an individual basis for the scheme.

Eventually, after protracted negotiations, Tata Steel UK agreed to sponsor a new scheme providing the same benefits as BSPS but with lower future increases. The various regulatory bodies agreed to an RAA, splitting the company from its pension scheme. Such arrangements are rare, and only possible when businesses are in distressed situations and in specific sets of circumstances.

As part of the RAA, Tata Steel paid £550 million into the BSPS and gave BSPS a 33% equity stake in Tata Steel UK Limited. Members of the BSPS were given the option of switching to the new scheme or moving with the old BSPS into the PPF. For the new BSPS to come into effect, certain qualifying conditions relating to factors such as size and funding level had to be met. 

Over 120,000 members were to be offered the choice of whether to transfer into the new scheme or the PPF.

A key concern for the trustee was that members who did not engage in the process would default into the PPF whether it was in their best interests or not. Johnston explained that “The trustee approached the government to see whether it might to possible to amend the law so that where an option was demonstrably in an individual’s best interest, then that would be the default for that individual (with the individual still having the option to choose an alternative). Whilst I believe the government understood the argument, they were uncomfortable about making a change which could have wider and potentially unintended repercussions elsewhere. As it turned out around 20,000 people defaulted into the PPF by not responding and we think many of these could have been better off in the new scheme, so perhaps this is something the government might want to look at for future exercises.”

21st century data

With over 120,000 members to contact to explain their choice, the scheme faced a significant task. Firstly, in order to reach members effectively and communicate complex pension options, getting complete electronic data in a usable digital format was crucial. The scheme worked with a team of specialist data consultants and project managers at Willis Towers Watson to digitise old records using a new smart technology based solution.

Given the size and maturity of the BSPS and pressing timescales, an innovative approach was needed. “Looking at the data, we realised we needed to bring to life the valuable data trapped in over 40 million paper, scanned and microfiche records. Our digitisation software was trained to extract the required data into a new electronic database which was then given to the data consultants to complete electronic records for over 55,000 members,” recalled Willis Towers Watson’s Hazel Kendrick, “bringing the database into the 21st century and future-proofing it for years to come”.

Complex data web

She added, “Using a cut of the new database, our teams delivered hundreds of thousands of calculations in a matter of weeks as well as moving the GMP reconciliation project forward at an impressive rate. Benefits had to be split between pre and post 1997 accruals – something that had never been required in bulk electronic format previously. We then needed to share this new data with a number of third-party suppliers, including communications agencies, printers and the people who dealt with members returning the option forms". Kendrick said that the programme had to manage a complex ‘data web’. The database had to integrate with:

  • Ongoing enhancements to the electronic database
  • Address tracing agency outputs
  • The impact of 100+ deaths a week (and the related new dependants)
  • The PPF’s and the new British Steel payrolls which needed to ensure that 80,000 pensioners were paid the correct pension on time

Willis Towers Watson used a 'data manager' function to map out and manage the complex data journey.

Figure 2. Member options

Option packs issued over 120,000. 30+ variation of options pack

The member engagement campaign

The trustee held a series of roadshows across the country. Kendrick said “The trustee team went around the country and spoke to 13,000 members face-to-face at over 40 sessions. This highlighted the importance of trusted spokespeople and a joined-up communications campaign. Beforehand, a warm-up campaign advised that more information was coming. We observed the importance of support within tight-knit communities – the British Steel members wanted to see people on the podium in front of them – people who they really trusted.”

Meanwhile, the Willis Towers Watson team helped to set up a comprehensive "Time to Choose" website and two different independent helplines – one for deferred members and one for the scheme’s pensioners. This was done in a very condensed timeframe – around four weeks. Over 100 call handlers took around 50,000 calls in the follow-on option window.

Along this journey, the scheme was inundated with transfer value requests from members. “The scheme paid around £2.7 billion of transfer values in the space of under a year – this itself was a massive operational effort, especially from the Glasgow Pensions Office standpoint – to make that happen,” explained Kendrick.

In the first two months of the communications campaign, over 50% of the members had sent back an option form, a remarkable engagement metric. But with so much at stake, Johnston and his fellow trustees were determined to reach every single member. “Allan said, ‘I am not happy with 50%, I want 100%’,” recalled Kendrick. “By the end, over 80% – in fact around 86% – of the members signed and returned an option form.” When comparing this to the latest research on member choice engagement the results that the trustee achieved are impressive!

Figure 3. Face-to-face member engagement

40 member meeting across 11 locations in just 6 weeks. Over 13,000 attendees

The lessons learnt

The BSPS’s situation was unique, but many themes will resonate with other trustees. So what advice would they give to others?

Be prepared

Although the Time to Choose exercise could only commence once the RAA had been approved and had to be completed by a set date, preparatory work had started some time before. Johnston commented “The trustee had always set high standards of administration and governance. Without a solid foundation the exercise could not have been completed in such a short period of time.”

A key component in delivering the new BSPS were the proceeds from releasing the security package negotiated by the trustee in 2007. Johnston commented, “At the time the security package was negotiated, the trustee could have had no idea how things would develop. It is testament to its far sightedness that scheme members have been able to secure a better outcome than might otherwise have been possible.”

Don’t underestimate the level of interest, both from members and the public

“The trustee was so focused on achieving what it believed to be the best outcomes for scheme members it perhaps underestimated the level of external interest,” admitted Johnston. “The number of phone calls, letters – everything that happened in the midst of what was a media storm – was quite astonishing. If you are getting into this kind of exercise, prepare for very high contact from members and other interested parties, with PR and media support from the offset – this is crucial.”

Expect difficult negotiations involving many different parties

Johnston, whose background is trade union negotiations, advised that, “Whilst we always try to build constructive relationships with our stakeholders, the BSPS Trustee was steadfastly focussed on securing the best possible outcomes for scheme members. This resulted in some challenging discussions with Tata Steel, the government and the various regulatory bodies.”

Think about key person risk and talent retention in a stressed scenario

“If you have the opportunity, do some upfront planning, don’t wait until a stressed situation lands. Preparation will make your initial response so much more robust. In the British Steel example, key person risk was a serious problem given how efficiently the scheme had been running for years, and we overcame that by empowering colleagues and senior advisers to take key decisions, which spread the load and mitigated risk enough to deliver the programme” says Kendrick.

Robust stakeholder briefings

When working with large groups of stakeholders, try to keep everyone on the same page, added Kendrick. “At the point when you get into your implementation window, you will be briefing lots of suppliers – if you can pull together a simple briefing document or arrange for everyone to dial into a conference call for a verbal briefing that keeps everyone in sync, this will bring about more consistency and also team working. Large delivery teams need robust stakeholder management and someone to identify where the gaps are. Strong project managers are like glue, looking for gaps and keeping all involved pulling together.”

Transfers out

In distressed or uncertain situations, be prepared for an influx of transfer-out requests. “The changes generated a massive appetite among our deferred membership for transfers out” recalled Johnston. “Two years ago we paid 100 DB to DC transfers, the following year we paid just under 500 and this last year we issued nearly 15,000 CETV quotations and paid around 7,800 transfers.”

Engagement channels

Think about different ways to engage, added Oxtoby. “Members appreciated people being there to answer questions one-on-one but this is not always possible so communications need to be tailored to individual circumstances as much as possible - there were over 30 versions of the member options pack. Think about engagement channels and how you can get messages across to your members, noting that those supporting delivery will need detailed knowledge of not only scheme benefits, but also the member data.”

By taking a robust approach to negotiation and keeping members’ best interests at the forefront – at every step of the way – the BSPS made the best of a challenging and unpredictable situation.

Figure 4.  Key engagement statistics

2 call centres: pensioners deferreds. Over 100 call handlers handled c. 50,000 calls. Over 80% member engagement overall