Steel crisis: Why is everybody suddenly so fascinated by pension pots?
The ongoing steel crisis has brought to the forefront not only questions about the UK's dwindling manufacturing industry but also worries about just how some of the country's biggest pensions commitments can be funded.
So, the steel workers haven't been topping up their pension pots?
Not exactly. Tata Steel's workers are members of the British Steel pension scheme, which operates a defined benefit model. Defined benefit scheme members are promised a certain amount per month throughout their golden years by their employer in return for their contributions, whereas defined contribution scheme members are responsible for topping up their own pension pot by a certain amount on a regular basis and then, thanks to the introduction of pensions freedoms last year, can be drawn out pretty much as the member wishes.
Therefore, if somebody buys Tata Steel, they may potentially also be buying the responsibility to fund the retirement of thousands of people.
Surely there must be some money set aside already?
The British Steel pension scheme already has a pretty penny or two locked away in its coffers, thanks to holdings in the likes of Royal Dutch Shell, HSBC Holdings and BP. In fact, according to its 31 March 2015 annual funding update, it has just shy of £14bn worth of pretty pennies.
Then what's all the fuss about?
While few people would turn down £14bn, the pension scheme's liabilities are actually £14.5bn, creating a deficit of £485m.
That's not good, is it?
Not really, but it does mean the pension has a funding level of 97 per cent. By comparison, figures released by JLT Employee Benefits at the start of the month discovered that the funding level across all defined benefit schemes in the private sector was just 82 per cent at 31 March 2016 – that's a total deficit of £273bn.
This problem isn't unique to Tata Steel, then?
Most certainly not. Struggling retailer BHS has recently made headlines for its £571m pensions deficit, while recently privatised Royal Mail found its pensions pot a water cooler topic when it had to be rejigged after the company moved out of the private sector.
Do we not safeguard against this sort of thing?
Actually, we do. The Pension Protection Fund will effectively bail out a company's pension pot when there's no hope of it doing so itself. However, such help doesn't come free, as it's funded by a levy on all defined benefit schemes and having to bail out the British Steel pension scheme could test it to its limits.