WHY SAVING British Steel pension scheme may harm YOUR nest egg

NOT only would the families of 130,000 workers have been watching anxiously yesterday while the Government outlined plans to save the British Steel Pension Scheme – but hundreds of lawyers too.

In its attempts to guarantee the retirement incomes of former steel workers – and save the industry they worked in by making a sale of Tata Steel’s UK assets more appealing – the Government has opened the door to a radical upheaval of UK pensions.

Legal experts representing some of the nation’s biggest employers are always desperate to find new ways to hack back the costs of running final salary pension schemes. And Business Secretary Sajid Javid’s statement to the Commons may have given them the next opportunity.

These best intentions could, for the first time, give the green light to firms to ignore pension scheme rules which demand they consult workers before taking the axe to benefits. The move would also allow firms to escape huge pension liabilities and potentially walk away from them, or shift them on to the taxpayer.

Under the plans, the pension fund, which has a £700m black hole, could be spun off as a separate entity and swingeing cuts made to savers’ benefits.

But this would set a dangerous precedent – effectively allowing firms to bring in radical changes to Britain’s last pension schemes at the drop of a hat and plug £309bn of black holes.

Former pensions minister Steve Webb, who now works for insurer royal London, says: ‘In a word, the problem with these rules is contagion. The Government says these rules apply to a unique situation but in reality it will be very difficult to make this apply to one pension scheme. I have no doubt that some chief executives of companies that have enormous black holes will be looking at these rules with a glint in their eyes.’

Final salary pensions, which promise a set generous payout to employees instead of forcing them to rely on the stock market like most other pensions today, are in a parlous state.

The problem stems from the fact that former workers are living far longer. This has been compounded by poor investment returns and the fact many firms have failed to pay enough into the schemes over the years.

According to figures compiled by consultancy Lane Clark & Peacock, just 24 out of FTSE 100 firms with final salary pensions have more than enough money in their schemes to meet pay out promises. Ten companies had eye-watering deficits totalling nearly £40bn.

Some of the biggest black holes include defence giant BAE Systems which has a £5.4bn deficit – more than a third of the total size of the £15bn company. BT’s £7bn deficit is nearly a quarter the size of the £30bn company.

Then there is the BHS pension scheme which has a £571m black hole, and now looks set to end up in the lifeboat Pension Protection Fund.

FIrmS are pushing vast sums into these pension schemes as they grapple with these huge liabilities. According to Lane Clark & Peacock, in 2014 FTSE 100 firms ploughed £12.5bn into their final salary pensions. But this was a noticeable reduction on the £14.8bn paid in 2013 and the £16.8bn paid in 2012.

Others have introduced cost saving cuts to members’ benefits. One popular method is to allow workers to swap some or all future inflation linked increases to their pensions for a higher payout today. Such steps have been carried out by BAE Systems and energy giant Centrica which owns British Gas.

many more closed their schemes or shunted remaining workers into riskier stock market linked pension schemes.

The Pension Protection Fund, already ensures members of final salary schemes still receive payouts if the company they work for goes bust. It will pay up to 90pc of a pension of a worker, who has not yet retired, up to a set limit.

But such an escape route is barred to profitable firms.

The proposed laws, designed for the British Steel pension scheme, could be their golden ticket. They would allow firms to ditch their final pension liabilities – even if they are otherwise making healthy profits.

Firms would cut back on the generous cost of living increases from which final scheme members currently enjoy. The plans for the British Steel Scheme include switching cost of living increases from the higher retail Price Index to the lower Consumer Price Index. This could make pensions worth 15pc less over time.

This is because a pension built up by workers before 1997 would not receive any inflationary increases. Such a shake-up would hit hardest those who had retired before 1997 and who had worked for the same company all their lives.

It would mean their pension payouts would remain effectively frozen – and their value would diminish over time. Such a move would scrap one of the most fundamental rules of pensions that existing benefits cannot be stripped away from members.

Tom mcPhail, head of retirement policy at investment firm Hargreaves Lansdown, says: ‘It is well- established that pension benefits, once granted, cannot be taken away. The Government should be very cautious about sacrificing such a principle in pursuit of short-term interests, even if there are tens of thousands of jobs at stake.’

THE added danger of the British Steel proposals is that it gives the green light for less scrupulous employers to walk away from the promises they have made their workers.

It is very hard for a final salary pension scheme to stand on its own two feet, and most would still require an organisation to stand behind it and back it.

This could be the new buyer of the steel plants – but for many experts the view is the Government is so desperate to find a solution to the steel crisis it may also be forced to back the scheme.

This shouldn’t be too much of a problem if promised payouts to members remain as forecast. But if something changes, for instance, if there is a stock market crash and the cost of payouts balloon, the taxpayer could be on the hook for the extra cash.

And if other firms are allowed to follow in the footsteps of the British Steel Pension Scheme, these sums could be enormous.

The Government is keen to stress that the new rules are simply a consultation and nothing is set in stone. And yesterday in Parliament the Business Secretary said that the measures had been specifically designed for a ‘very unique situation’.

But there is sure to be more than a few chief executives of companies with beleaguered final salary schemes, carefully analysing the Government plans and praying that steel will be their saviour.