History of the Scheme

The Coal Industry was privatised in December 1994 and because of this contributing members of the BCSSS became deferred (preserved) members in the BCSSS.

On privatisation, the Government Guarantee was established and the BCSSS was split into four ‘Sub-funds’ as a result:

• The Guaranteed Fund, which paid the pensions that members earned when contributing to the Scheme, including all the benefit improvements awarded before privatisation. These pensions, including annual increases, are fully guaranteed (Guaranteed Pensions).
• The Bonus Augmentation Fund, made up of the 50% members’ share of surpluses after 1994. Benefits paid from this Sub-fund were usually awarded as bonuses, payable for life. However, they were not guaranteed and, if insufficient funds were available, they could be reduced (known as standstill).
• The Guarantor’s Fund, was made up of the Government’s 50% share of the surpluses arising after 1994. These were paid to the Government over a 10 year period.
• The Investment Reserve, made up of British Coal’s remaining share of the surplus in 1994. This was due to be repaid to the Government by 2019. The Investment Reserve has acted as a buffer which protects members’ bonuses and provides some protection for the Government having to make new contributions.

The Guarantee provisions are contained in the Coal Industry Act 1994 and in the BCSSS Scheme and Rules. A separate Guarantee Deed between the Trustees and the Secretary of State for Trade and Industry (now Department of Business, Energy and Industrial Strategy (DBEIS)) means the Government as Guarantor has to honour the Guarantee. The Guarantee ensures that the Scheme has enough funds to pay pensions, because if the funding position worsens, the Government will have to pay money into the Scheme to make sure that future pensions can be paid in full.

Every three years the Government Actuary carries out an Actuarial Valuation to assess the finances of the Scheme.

If the Guaranteed Fund was in surplus, (i.e. there was more money than the Scheme needed to pay the promised benefits) the surplus would be shared equally between the Bonus Augmentation Fund and the Guarantor’s Fund. The funds in the Bonus Augmentation Fund were used to award bonuses to members and the funds from the Guarantor’s Fund would be paid to the Government over a 10-year period.

If the Guaranteed Fund was in deficit (i.e. there was less money than the Scheme needed to pay promised benefits), there were two consequences:

1. Money needed to make up any shortfall in the Guaranteed Fund would be transferred from the Investment Reserve (and possibly also from the Guarantor’s Fund and the Bonus Augmentation Fund); and
2. Level bonuses would be converted to reducing bonuses (known as standstill). At privatisation, ‘standstill’ conditions were included in the Rules, under which, if there are insufficient funds in the Bonus Augmentation Fund to support the continued payment of bonus pensions, level bonuses would be converted to reducing bonuses.

When bonuses were in standstill, they reduced by the same amount as the annual Retail Prices Index (RPI) increases to Guaranteed Pensions, meaning that total pensions would remain level or “stand still”. In these circumstances, if no new bonuses were awarded, total pensions would remain level until those reducing bonuses reduce to nil.

The 2012 Actuarial Valuation was the last valuation performed on this basis. As a result of the 2012 valuation the Trustees were able to award three separate level bonuses equivalent to 2% of Guaranteed Pension payable in 2014, 2015 and 2016.

The Trustees were concerned about the financial outlook for members because if no significant new bonuses could be awarded, pensions from the Scheme would remain level until the current reducing bonuses had reduced to nil. So, after 2016, members were faced with the likelihood of no significant increases to total pensions until at least 2021, and possibly for longer. When the effect of inflation is taken into account, members would have been worse off. The Government was also concerned that under the Rules they could be made to pay significant funds into the Scheme which would not have been available to increase members’ benefits.

With this in mind, the Trustees and the Government agreed changes to the Scheme which meant that the surplus sharing and standstill provisions ceased to apply from 13 February 2015 (resulting in the removal of the Sub-funds), and the amount of pension members receive in future is guaranteed and no longer depends on the financial position of the Scheme. The Government Guarantee remains in place and the amended benefits remain covered by that Guarantee.

New Level Bonuses

In addition, it was agreed that three new level bonuses equal to 2% of Guaranteed Pension would be paid in 2017, 2018 and 2019.

Bonus awarded up to 2014

All bonuses awarded prior to 2014 were in standstill, which meant that, in the absence of any new bonuses, total pensions would have remained level for a considerable period. This was because the RPI increase to Guaranteed pensions was offset by a corresponding reduction in the pre-2014 bonus.

Bonus from 2020

No new bonuses would be awarded after 2019. At this point all existing bonuses in payment would be added together to form a level bonus, which would not reduce or increase.

The triennial Actuarial Valuation results no longer impact upon member’s benefits following the changes made to the Scheme in 2015 as future bonus payments from the Scheme became fixed. The Actuarial Valuation now provides two figures - the first is the future rate of investment return that the Scheme will need to earn in order to pay the pensions promised to members, and the second is the rate of return needed in order to be able to pay both the pension promised to members and the Investment Reserve to the Government in 2033.