Tata Steel UK’s pension scheme deficit is set to balloon to up to £2bn and Britain's largest steelmaker believes it could face insolvency unless a way can be found to tackle it, the scheme’s trustee has told members.

Indian parent company Tata Steel has held talks to merge its European assets with Germany’s ThyssenKrupp, but the success of those talks hinges on Tata being able to separate itself from its British pension scheme.

The steelmaker, whose British unit lost £2bn in the five years to March last year, is looking for regulatory approval to spin off the £15bn pension scheme into a standalone entity, cut benefits and continue trading.

The trustee for the scheme warned members in a letter that it expects to report the £1bn-£2bn deficit at its next actuarial valuation at the end of March. The last actuarial deficit valuation was £485m.

In the letter seen by Reuters, the trustee said the deficit has surged because Tata Steel UK might no longer be able to get funding from its parent, meaning the trustee would have to make risk-averse investments that would likely cut returns.

“A deficit of this magnitude might require contributions of £100-200m each year for 15 years,” said the trustee for the company’s British Steel Pension Scheme (BSPS).

“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,” the trustee added.

ThyssenKrupp chief executive Heinrich Hiesinger told German newspaper Handelsblatt that Tata Steel must resolve the pension deficit at its British and Dutch operations before any merger of its steel operations with the German company.

The BSPS is one of Britain’s largest final salary pension schemes, with 130,000 members, but only about one in 13 members currently contributes to it. Tata inherited the scheme when it bought Corus, formerly state-owned British Steel, in 2007.

If Tata Steel UK fails, its pension scheme would fall into the Pension Protection Fund (PPF), a lifeline for failing schemes, which would cut benefits for all members, with those not yet drawing their pensions hardest hit.

“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,” it said.

Business news: In pictures Show all 13 1 /13 Business news: In pictures Business news: In pictures Flybe collapses Airline Flybe has collapsed. All future flights on the Exeter-based airline have been cancelled – leaving more than 2,300 staff facing an uncertain future, and wrecking the travel plans of hundreds of thousands of passengers. The chief executive, Mark Anderson, said: “Europe’s largest independent regional airline has been unable to overcome significant funding challenges to its business. AFP via Getty Business news: In pictures Future product placement will be 'tailored to individual viewers' Marketing executives say that product placement in films and televison shows on streaming services such as Netflix may be tailored to individuals in future. For instance, if data shows that a viewer is a fan of pepsi, a billboard in the background of a shot would host an advert for pepsi, while for a viewer known to have different tastes it could be for Coca-Cola Paramount Business news: In pictures Corbyn wishes Amazon a happy birthday In a card sent to Amazon CEO Jeff Bezos on the company's 25th birthday, Labour leader Jeremy Corbyn writes: "You owe the British people millions in taxes that pay for the public services that we all rely on. Please pay your fair share" Business news: In pictures No deal, no tariffs The government has announced that it would slash almost all tariffs in the event of a no-deal Brexit. Notable exceptions include cars and meat, which will see tariffs in place to protect British farmers Getty Business news: In pictures Fingerprint payment NatWest is trialling a new bank card that will allow people to touch their hand to the card when paying rather than typing in a PIN number. The card will work by recognising the user's fingerprint NatWest/PA Wire Business news: In pictures Mahabis bust High-end slipper retailer Mahabis has gone into administration. 2 Jan 2019 Mahabis Business news: In pictures Costa Cola Coca-Cola has paid £3.9bn for Costa Coffee. A cafe chain is a new venture for the global soft drinks giant PA Business news: In pictures RIP Payday Loans A funeral procession for payday loans was held in London on September 2. The future of pay day lenders is in doubt after Wonga, Britain's biggest, went into administration on August 30 PA Business news: In pictures Musk irks investors and directors Elon Musk has concluded that Tesla will remain public. Investors and company directors were angry at Musk for tweeting unexpectedly that he was considering taking Tesla private and share prices had taken a tumble in the following weeks Getty Business news: In pictures Jaguar warning Iconic British car maker Jaguar Land Rover warned on July 5, 2018 that a "bad" Brexit deal could jeopardise planned investment of more than $100 billion, upping corporate pressure as the government heads into crucial talks AFP/Getty Business news: In pictures Spotif-IPO Spotify traded publically for the first time on the New York Stock Exchange on Tuesday. However, the company isn't issuing shares, but rather, shares held by Spotify's private investors will be sold AFP/Getty Business news: In pictures French blue passports The deadline to award a contract to make blue British passports after Brexit has been extended by two weeks following a request by bidder De La Rue. The move comes after anger at the announcement British passports would be produced by Franco-Dutch firm Gemalto when De La Rue’s contract ends in July. The British firm said Gemalto was chosen only because it undercut the competition, but the UK company also admitted that it was not the cheapest choice in the tendering process. Business news: In pictures Beast from the east economic impact The Beast from the East wiped £4m off of Flybe’s revenues due to flight cancellations, airport closures and delays, according to the budget airline’s estimates. Flybe said it cancelled 994 flights in the three months to 31 March, compared to 372 in the same period last year.

One plan under discussion involves closing the scheme to future accrual, spinning it off from Tata Steel UK, and offering members a choice between staying in it and getting PPF compensation, or moving to a new scheme that, for most members, would offer higher compensation than the PPF would.

Tata Steel UK would continue trading under such a plan, but would have to pay a large sum in return for ending its liabilities for the scheme.

“If the trustee is satisfied that Tata Steel UK insolvency is otherwise inevitable (as currently seems likely), the trustee believes that separation in the way outlined above would secure the best outcome for BSPS members,” it said.