Pension deficit at Tata Steel UK could drive away potential buyers

The sale of Tata Steel's UK operations may run into some problems. Its £2.5bn (€3.22bn, $3.65bn) pension blackhole may put off potential buyers from making a bid for the loss-making steel maker.

The Indian conglomerate, which has put the company up for sale, said the pension fund, which has 133,000 members, has £14bn in assets and a funding deficit of £485m. However, according to sources aware of the deal, the purchase cost of this fund could be around 2-5 times the size of its funding hole.

Tata Steel had on 30 March announced it would sell its loss-making UK steel business, which includes Port Talbot and other steel-making sites in the country. This business employs about 11,000 direct employees and supports at least twice of that in the supply chain. While it had earlier set 28 May as a deadline for finding a buyer, industry sources say that this date could be postponed to June.

However, if Tata Steel fails to find a buyer and goes into insolvency, this pension fund will come under the purview of the Pension Protection Fund (PPF), a statutory fund in the UK established to help people get their pensions from a company in the event of insolvency. One pension insider said such an incident was like "dropping an elephant into a lifeboat".

One source who has seen the initial sale documents issued by Tata said: "Working out whether or not there is a sustainable business at Tata is the first task but the biggest financial problem is the pension." Another source associated with the sales process said the UK government was hesitant in coming on board to support the pension fund as it feared such a move could set a bad example, according to The Telegraph.

The recent insolvency of BHS has heightened the sense of urgency because the collapse affected its pension fund. The retail giant's 20,000-member pension scheme was transferred into PPF.