Tata Steel UK, formerly Corus Group, has taken one more step towards solving its financial woes by moving its pension-related liabilities to a new entity.
It said the UK Pensions Regulator has approved a Regulated Apportionment Arrangement or RAA that separates the pension scheme from itself.
Tata Steel UK will pay £550 million to the separate entity that will now house the pension liabilties.
It will also give shares in Tata Steel UK equivalent to a 33% economic equity stake to the new entity.
“The new scheme would have lower future annual increases for pensioners and deferred members than the British Steel Pension Scheme, giving it an improved funding position which would pose significantly less risk for Tata Steel UK,” the company, a part of India’s Tata Group, said.
Tata Steel’s Europe operations have been under tremendous financial stress due to a big increase in debt and poor demand for its specialized steel in its local, European market.
Its Indian parent has been trying to sell the company, or its units and plants.
However, in December 2016, Tata made commitments to invest £1 billion over ten years into its British operations, and continue operating two blast furnaces at Port Talbot for at least 5 years.
It also promised to avoid compulsory redundancies in the next five years. As a part of the deal, the labor unions agreed to the closure of the defined benefit pension scheme — a move that has now been approved by the regulator.
“Although much work is still needed to ensure the business is competitive in future, the next step in this pensions process involves necessary formalities to set up the new scheme with a lower risk profile following the necessary member consent process led by the trustee,” said Koushik Chatterjee, Tata Steel’s Group Executive Director.
“This will take some time to implement given the wide membership base of the scheme. The net financial impact of the RAA including the payment of the agreed £550 million settlement amount will be reflected in the Q2 FY18 financials for the company.”
The Trustee of the new pension entity will communicate with all scheme members about the separation and the proposed new pension scheme, the company added.
Tata Steel UK said it has also agreed to sponsor a proposed new pension scheme for those who refuse to move to the new arrangment.
“Now the RAA has completed, all members of the BSPS will be invited to transfer to the new scheme. If the qualifying conditions (for setting up the new scheme) are met, members who choose to will transfer to the new scheme,” it said.