Through a regulatory filing, India's steel manufacturer Tata Steel has informed that 60 per cent of the British Steel Pension Scheme's (BSPS) liabilities are now insured. The buy-in insurance policies purchased using existing assets of the scheme, are held as long-term investments of the Scheme and have the advantage of perfectly matching a proportion of the liabilities, thereby de-risking the scheme from potential future mismatch between asset and liability values with changes in market variables.
As of 30 September 2022, the BSPS represented a net surplus in the Tata Steel balance sheet of ~£1.5 billion. During the period of unprecedented interest rate volatility in the UK in September-October 2022, the BSPS funding level actually improved, and it had sufficient collateral to maintain its interest rate and inflation hedges. Overall, the scheme continues to have a healthy surplus and its risk position has improved since its restructuring in 2018, and quarter-on-quarter.
The BSPS Trustee previously entered into buy-in policies with Legal & General in November 2021 and May 2022 to insure 5 per cent and 25 per cent of liabilities respectively (totaling about ~£2.8 billion). Tata Steel UK is fully supportive of the Trustee having secured insurance cover of the scheme’s liabilities and expects that a residual buy-in for the remaining ~40 per cent of liabilities will be completed in the first half of calendar 2023, depending on market conditions. With full insurance buy-in completed, the scheme and in turn Tata Steel UK will be fully covered against any funding shortfalls arising from changes in underlying conditions or market variables in future.
With each buy-in, a portion of the accounting surplus has been “utilized” to secure insurance for the scheme. In addition, changes in interest rates (along with changes in credit spreads and other actuarial assumptions) also results in changes in the discounted present value of assets and liabilities. Accordingly, in line with previous quarters, there will be a non-cash deferred tax charge in the profit and loss related to the reduction in the pensions surplus (which is recorded under other comprehensive income).
We expect the same accounting treatment for the residual buy in transaction for the scheme liabilities. The BSPS is an independent fund with a team managed by its own board of Trustees, separate from Tata Steel UK. Earlier in 2022, the Trustee appointed Legal & General Investment Management (LGIM) to manage the combined assets of the Scheme, bringing additional skills and expertise as the scheme approaches full buy-in.
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