THE government has been warned that plans to cut pension benefits to help save Tata Steel's operations would be "an unmitigated disaster."

A £485m pension deficit has been deterring potential buyers of Tata Steel's UK business.

A sell-off could safeguard 500 jobs at Tata's Hartlepool Pipe Mill.

A consultation on the pension scheme's future has been launched by ministers.

It includes a "full range of options that consider whether and how the scheme could be separated from the existing sponsoring employer and whether it will be necessary to reduce the benefits within the scheme," the Department for Work and Pensions said in a statement.

One option is to base the scheme's annual increase on the Consumer Prices Index (CPI) inflation measure, which is usually below the Retail Prices Index (RPI) measure currently used.

The plan has been supported by some union leaders and the British Steel Pension scheme.

The steel trade unions - Community, Unite and GMB - today issued a statement to say they have been in talks with the Government and Tata Steel for a number of weeks to secure a sustainable future for our industry.

They added: "A number of bidders have made it clear that the British Steel Pension Scheme (BSPS) presents a major challenge to any sale. We also fully understand the great importance of this pension scheme to both current and former steelworkers and steel communities across the UK.

"There has been a lot of speculation that any sale of Tata’s assets would involve the BSPS going into the Pension Protection Fund (PPF). The trade unions believe that such a move would be an unmitigated disaster. The PPF is a financial safety net but it would see every member of the scheme take an unnecessary cut in pension benefits. The financial health of the BSPS is such that going into the PPF can certainly be avoided.

We welcome the announcement of a government consultation on the future of the BSPS and the trade unions will of course make a full submission in due course. It is important that all stakeholders continue to explore all available options that avoid the need for the scheme to go into the PPF, which would be the worst deal for scheme members. We will seek to work constructively with the UK Government and the scheme trustees to deliver the best possible deal for our members. We need to ensure that there are cast iron safeguards in place so this unique situation does not result in employers dodging their pensions responsibilities.

It is important to remember that Tata Steel remains the employer and sponsor of the BSPS. They have significant legal, social and moral responsibilities with regards to the British steel industry and those men and women who have worked and continue to work within it.

As we have done so throughout this process, we will continue to be led by our members in the steel industry. In the midst of this crisis and great uncertainty, they continue to produce world class steel that supports the UK’s entire industrial base. The steel industry’s highly skilled and dedicated workforce will surely be the foundation on which a sustainable, profitable future for the industry will be built.