New British Steel scheme to make £58mn additional payout – DB & Derisking

When the new scheme was set up in 2018, as a result of a regulated apportionment arrangement approved by the Pensions Regulator, the trustee agreed with Tata Steel UK — the scheme’s sponsor — that if the financial position of BSPS II as of March 2021 was better than expected, an additional one-time lump sum payment could be paid out to certain pensioner members.

According to a newsletter to members, the scheme’s latest actuarial valuation “has shown that the conditions for making this one-time payment were met, and £58mn is to be shared out”.

The scheme’s latest actuarial valuation, as of March 31 2021, showed a 105 per cent surplus on technical provisions, slightly lower than the 106.3 per cent registered in March 2018. 

The agreement to set up the new scheme included provisions for a potential additional payment for this category of members if the 2021 valuation resulted in an ‘unexpected surplus’. I am pleased to say that this condition has been met

Keith Greenfield, BSPS II

The agreement for a one-time payout was made due to the fact that, unlike the old scheme, BSPS II does not provide inflationary increases on any pension earned before April 1997 above any guaranteed minimum pension element.

The payment is therefore intended to provide some compensation to members for this difference for the period between 2018 and 2021.

Keith Greenfield, chair of the BSPS II trustee, said in the newsletter: “If part of your scheme pension currently in payment was earned from service before April 1997, you will have a special interest in the outcome of the 2021 valuation.

“The agreement to set up the new scheme included provisions for a potential additional payment for this category of members if the 2021 valuation resulted in an ‘unexpected surplus’. I am pleased to say that this condition has been met.”

With 57,500 pensioner members, the increase will be paid out to around 50,000 members, who are eligible if they were receiving a pension at both March 31 2021 — the time of the scheme valuation — and March 31 2022, and if the individual earned some or all of that pension before April 1997.

According to the newsletter, eligible members will receive a letter from the trustee around June, which will include the amount expected to be paid. For the majority of individuals, this will be paid as a lump sum, and the minimum payment is expected to be at least £250 before income tax.

The trustees expect to make the payments in October 2022, giving the scheme’s pensions office and the trustee’s advisers time to prepare the calculations required for the approximately 50,000 lump sum payments, it added.

Scheme on route to buyout

Despite a slight dip in the scheme’s surplus on technical provisions, due to factors such as “the impact of the global pandemic on investment markets and the government announcement on how retail price index inflation will be calculated from 2030 onwards”, BSPS II saw its buyout funding improve in the latest valuation.

The pension fund is now 94.5 per cent funded on a buyout basis, which compares with 90.1 per cent in the previous valuation, “mainly because investment performance relative to estimated insurance pricing has been better than assumed”, the newsletter stated.

Greenfield explained that, over time as the scheme matures, the BSPS II “funding level is expected to improve further and ultimately reach 103 per cent on the buyout basis”.

“If and when that happens, benefits are expected to be secured with one or more insurance companies, and the 3 per cent surplus will be used to increase members’ benefits in accordance with the provisions agreed when the new BSPS was established,” he said.

BSPS members’ compensation falls short by £18mn, NAO finds 

Compensation for members of the old British Steel Pension Scheme has fallen short by £18mn, according to a report by the National Audit Office, which warned that the risk of large numbers of savers looking to transfer out of a defined benefit pension still remains.

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“Achieving the funding level to trigger this additional payment to members and secure their benefits remains the key priority for the trustee.”

With this in mind, at the end of 2021 the scheme agreed to a buy-in with Legal & General covering around 5 per cent of liabilities.

“This does not affect the benefit entitlements or security of benefits of any member. The buy-in policy is held as a long-term investment,” Greenfield added.

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