Tata Steel: Infrastructure investment is the key to solving the pension problem, says City heavy-hitter

Hopes British Steel pension scheme members could be paid in full were raised today after a City heavy-hitter proposed a radical deal to spin-off the mammoth £15bn fund.

Tata Steel is currently in talks with German industrials firm Thyssenkrupp to buy its European operations – a deal understood to only go ahead if the pension scheme, which serves 130,000 members, can be either spun-off or left behind.

Edi Truell, the man behind private equity firm Duke Street, put forward plans earlier this week to revamp the scheme as a standalone entity, keeping it out of the pensions lifeboat, the Pensions Protection Fund (PPF).

Meanwhile, Tata Steel has been working with stakeholders to drive through changes to the pension scheme that would reduce members benefits, albeit to levels higher than could be expected if the scheme fell into the PPF.

Infrastructure

But Truell told Reuters reporters that under his proposals there would be no need for pension members to take a haircut to their payouts.

He said he could preserve the status quo by rejigging the assets the fund invests into. Instead of lower risk index-linked government bonds he believed putting money into higher yielding infrastructure projects could plug any pension shortfalls.

However, the British Steel pension trustees labelled Truell's plans not "viable". Allan Johnston the chairman of the trustees said:

“The Trustee of the British Steel Pension Scheme confirms that Mr Truell made unsolicited proposals regarding the future of the scheme involving the Truell Charitable Foundation and related entities. The Trustee and its advisers met with Mr Truell and his advisers to discuss those proposals.

“Mr Truell’s proposals would have involved entities under his control taking responsibility for managing the Scheme’s assets of nearly £15 billion, taking a share of future investment out-performance, and providing a limited covenant to cover downside risks.

Mr Truell’s proposals were dependent on co-operation and commitments from HM Government and Tata Steel, corporate and financial transactions with third parties, and approval by the Pensions Regulator. Mr Truell was unable to demonstrate that there was any reasonable prospect of these things happening.

“With the benefit of its knowledge of all the circumstances currently surrounding the scheme, the Trustee concluded that Mr Truell’s proposals were not viable and would expose members to unacceptable risk. This has been explained to Mr Truell."

Radical

Meanwhile, Truell's proposals were labelled as "radical" by Hargreaves Lansdown pensions expert Tom McPhail.

Nevertheless, added McPhail, the trustees could in theory sign them off.

Both the Pensions Regulator and the PPF would likely need to give Truell's proposals the green light before being considered by other parties. Trustees would then follow the advice of actuarial experts on a revamped investment strategy.

"Investment consultants don't like straying from the pack," he said.

Large infrastructure projects, such the HS2 rail expansion, are dependent on large amounts of long-term funding. Although UK pension funds have tended to steer away from such investments in the past, there are growing calls from Westminster to encourage pension schemes to invest in projects that provide a "social good" for the country.

"Nevertheless, there are elements of the government that would be very enthusiastic about this," said McPhail.