LONDON India's Tata Steel (TISC.NS) has agreed the main terms of a deal to cut benefits for its British pension scheme in a move that will see the firm back a new plan that will pose less risk to the company.
The pension scheme is a major stumbling block in talks to merge Tata's British and European steel assets with those of Thyssenkrupp (TKAG.DE), because the German company is opposed to taking on 15 billion pounds in UK pension liabilities.
The fate of Tata's British businesses, including the country's largest steelworks at Port Talbot, has been in the air since Tata Steel said a year ago it planned to sell its British assets following heavy losses.
Pensions consultants questioned, however, whether the pensions deal announced on Tuesday would be enough to satisfy Thyssenkrupp.
Tata said the deal will see it plough 550 million pounds into the British Steel Pension Scheme (BSPS), one of Britain's largest final salary schemes with 130,000 members.
The deal is subject to formal approval by The Pensions Regulator, but Tata said it expected to get approval shortly.
"We are in a very positive consultation with all stakeholders," said Tata Steel's executive director for finance and corporate Koushik Chatterjee.
Tata Steel UK has agreed, as part of the deal, to sponsor a new pension scheme that will have lower benefits than those of the original BSPS and will therefore pose less of a risk to the company.
As a further safety measure, Tata will give the BSPS a 33 percent equity stake in its UK business.
BSPS members who do not agree to move to the new scheme will automatically transfer to the Pension Protection Fund (PPF), which said all members, including those in the new scheme, are guaranteed at least PPF compensation levels.
The PPF is a lifeboat for pension schemes in Britain that run into trouble.
"Good progress is being made," The Pensions Regulator said.
But it added: "We will only approve (pensions restructurings)...where stringent tests are met, so that they are not abused by employers seeking to inappropriately offload their pension liabilities."
Martin Hunter, principal at pensions consultant Punter Southall, said the deal did not involve a total separation of the pension scheme from Tata.
Thyssenkrupp has consistently opposed taking on Tata's UK pension liabilities, though it continues to pursue merger talks with Tata in a bid to achieve sector consolidation and tackle Europe's excess steel capacity.
"The $64,000 (£49,541) question is ‘is this good enough for Thyssenkrupp, given that Tata Steel UK is still on the hook for the pension scheme?’,” said independent pensions consultant John Ralfe.
Thyssenkrupp declined to comment.
The merger is vigorously opposed by German trade unions, who fear large-scale job cuts as a result - probably at Germany's expense after workers at Tata Steel's Port Talbot plant in Wales were recently given job guarantees.
Tata Steel reported an unexpected fourth-quarter loss on Tuesday due to one-off exceptional items, including charges related to the pensions deal.
It posted a fourth-quarter net loss of 11.68 billion rupees (£141.2 million), compared with a net loss of 30.42 billion rupees a year ago.
The company’s current debt is 730 billion rupees as of the end of March 2017.
(Additional reporting by Promit Mukherjee, Georgina Prodhan, Tom Kaeckenhoff; Editing by Jane Merriman and Susan Thomas)