How pension policy cowardice helped doom Britain’s steel industry
Tata’s decision to write off the value of its UK steelmaking business and seek a quick sale, while keeping its Dutch business, has sparked an intense political debate in Britain. But much of it is really a story about pension regulation and how it has impacted Tata’s UK pension fund – still known as the British Steel Pension Scheme – versus its Dutch counterpart, Pensioenfonds Hoogovens.
Tata inherited both when it bought Corus in 2007. In terms of size, BSPS has about 134,000 members, dwarfing Hoogovens which has 28,500 members. But in terms of assets they are not that different, with about £14 billion in BSPS and £6 billion in Hoogovens. More important than the assets are the liabilities of the two pension funds, and especially their ratio of assets to liabilities – the funding ratio – which relates to respective national pension regulations.
To explain how, I created a chart showing two separate comparisons over time. The first one compares the published funding ratios of BSPS and Hoogovens back to 2008 (and further for Hoogovens). You can see that Hoogovens’ funding ratio has always been above 100%, meaning it has never had a deficit, while since 2008, BSPS has never not had a deficit.
From Tata’s perspective one can see why BSPS has been such a pain. Before Tata came along, Corus had taken a three-year contribution holiday. After the acquisition, a newly empowered UK pension regulator required employers to pump money into deficit-ridden final salary schemes. Since 2007, BSPS has cost Tata billions. But Hoogovens on the other hand, has cost Tata nothing beyond its normal contribution costs as an employer.
So did Hoogovens pension fund get lucky, or do something brilliant? Not at all. It has faced similar increases in life expectancy and falling interest rates that have afflicted BSPS. Moreover, the Dutch pension regulator has complained about its performance. But since its funding ratio is calculated in a far less stringent way than the BSPS ratio, this hasn’t been a problem for Tata.
To understand the difference, click on the chart selector to look at the second comparison, which is between the annual increase in pensions offered by BSPS versus Hoogovens. The trust documents of BSPS stipulate that it must offer all members – current, deferred and pensioners – an annual increase equal to the UK retail price index, and this is what BSPS has done.
Now look at Hoogovens. For six years it didn’t pay any pension increases at all (there will also be no increase in 2016). This is because of a far-sighted Dutch law introduced a decade ago which limited the guaranteed part of final salary pensions to the nominal value. The funding ratio is calculated on this basis and if it falls below 112%, then pension funds don’t have to pay any annual inflation increases to members.
Contrast that with the UK, where as soon as a pension increase is made, it gets locked in as a permanent liability of the fund. If scheme members live longer, they receive this increased amount for longer too, compounding their fund’s woes.
Now you might feel sorry for Hoogovens’ members. Added together, they have missed out on about 13% of inflation-linked increases they would otherwise have received (they may still get these increases if conditions improve sufficiently). But then consider the effect on Tata’s Dutch steel business. Free of pension deficit burdens, it has received investment. Its workers are more skilled and higher paid than their UK counterparts. They produce steel of higher quality, far superior to the Chinese steel now being dumped on the market.
No surprise that Tata wants to keep this business, whereas if the UK business was a horse, Tata would probably shoot a bolt into its head and cart it off to the knackers’ yard. None of this is the fault of Tata’s current UK employees, who in recent negotiations have sacrificed over £1 billion in future pension accruals in an attempt to cut the deficit. Under UK law, this sacrifice cannot be shared out among the scheme’s deferred and retired members.
If anyone should be blamed, it isn’t the hapless Sajid Javid, but rather his counterparts and civil servants under John Major and Tony Blair. Ten or twenty years ago they deemed future final salary pension increases untouchable, without thinking through the consequences. The same pusillanimity infects thinking about UK pension rights today. Compare that with the Dutch whose farsightedness in pensions has now helped save their steel industry.
Where did the Dutch get their foresight? The Dutch Central Bank, which supervises occupational pensions in the Netherlands, carried out a Monte Carlo simulation of all the scenarios and advised the government to implement the rules. Back in 2005, I interviewed the Dutch civil servant, Dirk Witteveen, who was responsible for this. “We think it’s necessary for economic reasons, for the trust of society, for the improving of the competitive quality of the Dutch economy and for stability in the long run” he said.
How sad that the UK’s political system was incapable of such a vision.