Pensions issue in Britain a loudly ticking time bomb

In the half-light of dusk, Tata Steel’s Port Talbot smelting plant can emit an eerie industrial beauty as its fires light up against the Irish Sea and wind-blown plumes of smoke mask its sprawl.

In the full glare of the hottest September since 1911, this anachronistic metal monster could only be loved by its thousands of remaining employees. But for them an ill wind is blowing. A government plan to amend UK pension law to facilitate the sale of the rump of beleaguered Tata Steel UK to German white knight ThyssenKrupp appeared yesterday to be shoved towards a specially dusted down shelf.

The Indian parent company of what was once the nationalised giant British Steel said earlier this year it would pull out of the UK as plummeting global steel prices and dumping by Chinese rivals made it uneconomic to continue. With the Indian conglomerate selling off its interests piecemeal, one of the UK’s few remaining industrial businesses looks set for permanent decline.

Earlier this week, Tata said it had lost 32.9 billion rupees (£370 million) on the sale of its North Lincolnshire business to Greybull Capital for £1 in April, pushing it to a loss in the first quarter of this year.

And despite the perceived advantages of a falling pound for exporters, Tata’s business has become less competitive in the wake of Brexit as costs of imported input rose, and the company becomes keener by the day to exit the UK.

Sticking point

The sticking point in every deal to sell Tata’s loss-making UK business has been its near half billion pound pension deficit. Talks with government over the fund – which has 130,000 members – appear now to have reached an impasse.

The core plan was to somehow spin off the pension, either to facilitate a sale – possibly to Thyssen or to allow Tata to keep control of the rump business. In essence it involved switching pension payment calculations from the Retail Price Index, which includes growth in house prices, to the Consumer Price Index, which does not, thereby reducing costs by about £2.5 billion.

However, this mechanism – which would have required a change in the 1995 Pensions Act – could have opened the door to the dismantling of other defined benefit schemes. Not only did that smack of using a hammer to crack a nut, but it came against the backdrop of the collapse of BHS in June, which could cost taxpayers as much as £670 million unless Sir Philip Green changes his mind and plugs it.

The Tata deal failed, in part, because of post-Brexit personnel changes to the Cabinet. But a failure to grasp the pensions nettle to rescue a remnant of industrial Britain speaks volumes about the underlying pension problem faced the UK and many of its neighbours.

With Europe as a whole getting greyer fast – the median age is forecast to grow from 37.7 in 2003 to 52.3 by 2050 – the scale of the problem can only grow.

British Telecom (BT), for example, is not so much a listed company as a listless zombie pension deficit. The pension hole, at pre-Brexit count, was £10 billion, against a market cap of £40 billion. Top-up payments, at about £800 million a year, encapsulate the dilemma of the older British companies struggling to pay the final salary pensions of long-lived retirees from the revenues generated by their current employees, very few of whom will benefit from such largesse when their own time comes to retire.

And if the private sector looks bad, inter-generational inequality in the public sector where civil servants still retire in their early 50s on final salary – and in some cases index-linked – pensions, is a loudly ticking time bomb.

Contributions

Nowhere is this more manifest than at the Bank of England itself. Employees at the bank, led by its governor

Mark Carney

, receive the equivalent of an extra 50 per cent in salary in taxpayer-funded contributions, while most private employers pay just 5-10 per cent of salary into their employees pots.

At the same time the bank, which meets to debate UK interest rates Thursday, has slashed interest rates to boost the economy. That policy has been criticised for making it harder for private companies to earn a profit on their pension pots.

Ironically UK inflation, which according to Government figures held steady today at 0.6 per cent, is also not rising anywhere near fast enough to make a dent the huge public sector liabilities to millions of defined benefit pensioners.

MPs of course are the beneficiaries of a similarly generous taxpayer funded scheme, so don’t expect radical reform.

Helen Power is freelance journalist