Tata Steel has agreed a deal to restructure its 130,000 member British pension fund after nearly a year of negotiations.

The UK steelmaker, part of the Indian conglomerate, said it had approval from regulators and the trustees of the £15bn British Steel Pension Scheme (BSPS) to offload the scheme into the Pension Protection Fund, the government’s pensions lifeboat.

In return, Tata will inject £550m into the old scheme and the BSPS will own 33 per cent of Tata Steel UK.

A new defined benefit scheme, which provides a guaranteed income in retirement, will also be set up but with lower annual increases in income.

The deal will clear the way for Tata to merge its European steel business with German steelmaker ThyssenKrupp.

The legacy pension scheme has been a millstone around Tata’s British steelmaking business, which was threatened with closure last year after global steel prices crashed due to oversupply.

Union members voted to accept the closure of the BSPS earlier this year in an attempt to keep the tradition of iron and steelmaking alive at Port Talbot and save 8,500 jobs across the company, which also includes smaller mills throughout Wales and England.

The settlement involves a rarely used legal mechanism, called a regulated apportionment agreement, which allows an employer in financial difficulties to rid itself of defined benefit pension liabilities.

A final deal was signed off by the trustee of the BSPS, the UK pension regulator and the Pension Protection Fund. The one remaining barrier to a definitive settlement is a 28-day period for legal challenges.

A spokesman for the pension trustees said exact details of the new annual increases will be communicated to members “before October this year”.

Koushik Chatterjee, Tata Steel’s group executive director, said that “considering the continued challenges in the global steel industry as well as the uncertain global politico-economic environment”, the new deal represented “the best possible structural outcome for the members of the British Steel Pension Scheme and for the Tata Steel UK business”.

Under the RAA, scheme members will have the option to transfer in to the new retirement fund or fall into the PPF, which may be suitable for some members depending on their age and their individual financial goals, pension experts say.

John Ralfe, an independent pensions analyst, predicted that about 5,000 retired members of the BSPS scheme would not join the new scheme, instead staying with the old one.

He calculated that a separate group of BSPS members who wish to retire at 65 and want to take the maximum lump sum would be 6 per cent to 8 per cent better off going into the PPF.

Tata made pension reform a key condition of a rescue package that it offered to trade unions late last year. This included a pledge to keep both blast furnaces lit at Port Talbot, the UK’s largest steelworks, until at least 2020.

In a joint statement, trade unions Community, Unite and the GMB said: “We welcome the RAA announcement which includes a commitment that Tata will stand behind a new scheme with reduced annual increases. For more than a year our members have feared for their security in retirement, and this announcement helps to bring that uncertainty to an end.”

But Steve Webb, a former UK pensions minister, urged Tata and the pension trustees to ensure that the retirement fund’s members, many of whom are elderly, received extremely detailed guidance over whether they should move into the new scheme or lapse into the PPF.

“People are going to need a lot of individual help,” Mr Webb said. He added there were multiple complexities for scheme members to consider, such as “how old they are, when they worked and how much they earn or earned”.

He pointed out, for example, that for people who want to take out a quarter of their pension as a lump sum “the PPF is generally more generous than many [private] schemes are”.

BSPS pension trustee Allan Johnston urged the scheme’s members to switch over, however, arguing “the BSPS has sufficient assets to fund benefits in the new scheme that will be better than PPF compensation for most members, and to do so on a low-risk basis sustainably into the future”.

If the pension situation is resolved, it will open the door for Tata to merge its European steel activities with those of ThyssenKrupp. Talks were announced last summer.

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