The trustee of Tata Steel UK's pension scheme has warned its members that the company could face insolvency if it fails to address its pension scheme deficit.

Britain's largest steelmaker is seeking regulatory approval as it aims to spin off the £15bn scheme into a standalone entity, as part of its parent company's plans to merge its European operations with German sector peer Thyssenkrupp.

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However, according to a letter seen by Reuters, the trustee has warned that at the next actuarial valuation at the end of March, the pension scheme's deficit could jump from £485m to somewhere in the region between £1bn and £2bn.

"A deficit of this magnitude might require contributions of £100-200m each year for 15 years," Tata Steel's British Steel Pension Scheme (BSPS) said.

"Tata Steel UK has confirmed it cannot afford to make deficit recovery contributions and indicated that without action, the likely outcome is that it would become insolvent."

Tata Steel's UK division has lost £2bn in the five years to March last year and Heinrich Hiesinger, the chief executive of Thyssenkrupp, said on Friday (27 January) the negotiations remained complex due to Tata's pension deficit.

"We are conducting talks with Tata with great care," Hiesinger said. "It still remains open whether, when and with whom such a step in consolidating the industry will take place."

With 130,000 members Tata Steel UK's pension scheme is one of the largest in Britain, although figures show only one in 13 members contributes to the scheme, which the company inherited a decade ago upon purchasing Corus.

Should the steelmaker fold, its pension scheme would fall under the Pension Protection Fund (PPF), which ensures workers receive their pensions even after a company folds. To ensure pensions are paid even in the worst case scenario, annual taxes are charged on all schemes that could resort to enter the PPF should they need to do so.

BHS's pension scheme fell into PPF when the high-street retailer entered administration in April before eventually folding in June.

The trustee added: "The trustee has therefore been in discussions with Tata Steel, the government, the pensions regulator, the PPF [...] about how to separate the BSPS from Tata Steel in a way that secures better outcomes than entry into the PPF."