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Tata Steel UK's pension-scheme deficit could bankrupt steelmaker

The trustee for Tata Steel UK Ltd.'s pension scheme warned members that the scheme's deficit is set to grow to between £1 billion and £2 billion and could drive the steelmaker into insolvency, Reuters reported Jan. 26, citing a letter from the British Steel Pension Scheme trustee.

The actual deficit will be calculated when the next actuarial valuation is completed at the end of March; the previous valuation put the deficit at £485 million.

The trustee said a deficit of this magnitude could require an annual contribution of £100 million to £200 million for 15 years, adding that Tata Steel UK has confirmed it cannot afford such a contribution. It is also less likely that the U.K. arm will get funding from its Indian parent Tata Steel Ltd., the likely outcome of which would be the insolvency of the steelmaker.

The steelmaker is seeking approvals to separate itself from the £15 billion pension scheme it inherited in 2007 through the acquisition of Corus, to successfully negotiate a proposed merger of its European operations with Germany's ThyssenKrupp AG.

Meanwhile, ThyssenKrupp CEO Heinrich Hiesinger told German daily Handelsblatt that Tata Steel must find a way to first address the pension deficit at its British and Dutch operations before the merger of its steel operations with the German steelmaker could proceed.

Failure to secure consent to spin off the pension scheme would see the scheme falling into the Pension Protection Fund, resulting in reduced benefits for all 130,000 members.

The trustee is in talks with Tata Steel, the government and the pensions regulator on how to separate the scheme in a way that results in better benefits compared to the ones being offered by the Pension Protection Fund.

The separation of the scheme will, however, cost Tata Steel UK a large sum in exchange for walking away from its liabilities for the scheme.

Employees are set to vote Jan. 30 on the proposed arrangement, with three unions at Tata Steel UK recommending workers approve the deal, according to a same-day BBC News report citing a joint statement from the Unite, GMB and Community unions.

Under the proposed plan, the scheme will close to future accrual and be replaced with a defined contribution scheme with maximum contributions of 10% from Tata Steel and 6% from workers, BBC noted.