With serious offers now on the table for Tata Steel UK, Britain's government is racing against time to find a way to put the company's British pension fund on a sound footing to help facilitate a sale.
The consultation is looking at separating the pension scheme from Tata Steel and reducing its outgoings, while avoiding a collapse into the Pension Protection Fund (PPF), a government safety net that would leave many pensioners worse off.
Steel industry trade unions said it would be an "unmitigated disaster" if the scheme were allowed to fall into the PPF.
The British Steel Pension Scheme (BSPS) is one of Britain's largest defined benefit plans, with 130,000 members.
Even with a solvent employer sponsoring it, the scheme's 14 billion pounds ($20.6 billion) of liabilities exceeds its 13.3 billion pounds in assets.
Britain's steel industry has been hit by cheap Chinese imports, high energy costs and a global supply glut. India's Tata said in March it wanted to sell its remaining plants in the country, putting 15,000 jobs at risk and adding to the political pressure to find a rescue plan.
The consultation process concludes on June 23, the date of a politically divisive referendum on Britain's membership of the European Union.
The government said it was giving consideration to a proposal put forward by the BSPS and supported by Tata.
This would keep the pension scheme intact but require new legislation to allow a reduction in future benefits -- an almost impossible task under current regulations.
"Although this would entail future pension increases being cut back from their current levels, benefits would be more generous than those provided by the PPF for the vast majority of scheme members," said Allan Johnston, chair of the board of trustees of the BSPS.
Its annual increases in pension payments are linked to retail price inflation, but the new legislation would allow the BSPS to benchmark them against consumer price inflation (CPI), which is much lower.
"Moving to CPI is likely to reduce pension liabilities by around 2.5 billion pounds," said Clive Forbes, partner at pensions consultancy Hymans Robertson.
The government said this proposal would be a one-off, given the size of the BSPS and the urgency of resolving its problems ahead of a sale of Tata Steel's UK assets.
The main opposition Labour party sought assurances that it would not herald wider pension reforms.
"Any resolution ... must ensure that it avoids setting a potentially dangerous precedent for the millions of other occupational pensioners who currently enjoy RPI indexation rights," Labour business spokeswoman Angela Eagle told parliament.