British Steel Defined Benefit pension crisis the first of many?

News of developments in the deficit-laden £15 billion British Steel pension scheme has left 130,000 members with a decision to be made: stay in their existing scheme, soon to be placed into the Pension Protection Fund which offers compensation to members of Defined Benefit pension schemes with insufficient assets to cover liabilities, or to change to a second proposed scheme that offers less benefits and a reduction in funds. Unfortunately for British DB pension members elsewhere, this is a trend that is unlikely to stop with British Steel.

Merger requirements

Of the two choices on offer, the Pension Protection Fund offers at least some clarity in relation to the benefits set to be provided, whereas for the second scheme, which has been agreed to in principle by Tata Steel so as to push through a merger with Germany’s Thyssenkrupp, no details on what pension holders can expect has been released. The only certainty is that with both options, it will be less than promised by the pension scheme to which the members originally signed up.

The story of British Steel is complex; full of mergers, insolvency and steelworks closures, which have threatened not only the livelihoods and retirement plans of tens of thousands of loyal staff, but of the entire British steel industry itself.

Respite for the industry came when the German multinational stepped forward with a conditional investment, which requires the pension scheme to be closed to 8,200 current employees and the reduction of future pension obligations of Tata Steel UK.

DB pension transfers double

For the 8,200 existing employees, and 34,000 deferred members, many must consider the choice to cash in what they have and move it into a defined contribution pension. For 89,000 pensioners already drawing on their pension – no such option exists.

Transfers out of the British Steel pension scheme doubled in in the tax year to April 2017, and with fresh uncertainty and, in all reality, a bleak outlook as to what further cuts may come into effect, that trend is likely to continue.

Another factor in the increase in transfer activity is the high transfer value currently on offer. This is especially applicable to expatriates planning on retiring overseas as the value of the pound find itself on a downward spiral.

Expats are afforded a range of pension transfer options which were built to avoid the uncertainty and falling value of Defined Benefit pension schemes. And, although the benefits of a DB scheme include a guaranteed income from 65 until death regardless of investment performance, with no real outlook on exactly what that income is likely to be initially or remain at for the duration, it seems many are being forced to seriously consider their options.

SIPP / QROPS advice

Transfers to UK pensions or Overseas pensions, such as QROPS, offer the investor a great deal of choice when it comes to investment – diversity and different approaches tailored for risk appetite, being just two. Combined with flexibility in drawdown, currency fluctuation avoidance, a range of tax benefits and a dedicated financial manager to advise and take joint decisions with, finally there may be some clarity available for those holding DB pensions in the UK but planning to retire overseas. Unfortunately, the 89,000 British Steel pensioners facing a reduction in
their UK pension income have no such clarity, and no such choice…

To find out more about your DB pension transfer options, speak to one of our experts today.