The government is inching away from Tata Steel's preferred plans for dealing with its £15bn pension scheme.
The Department for Work and Pensions closed a consultation into the future of the British Steel Pensions Scheme in late June, and both Tata and trustees have been pushing for the scheme to be hived off.
The scheme could then be indexed to the slower rising consumer price index, rather than the retail price index.
However, the plan would require parliamentary action in order to change legislation that prevents trustees from changing the annual rise in pensions income.
Finding a solution to the scheme's growing deficit is regarded to be critical to a potential tie-up with German steelmaker Thyssenkrupp.
But now, Westminster sources suggest officials are distancing themselves from the plan, which would require cross-party support to reform section 67 of the 1995 Pensions Act.
“The government have been moving away from this option. Nothing has been formally ruled out yet, but it would not be a surprise at this point for them to officially say this is off the table.”
Tata is understood to have responded by preparing further alternatives as it seeks to complete the ThyssenKrupp deal.
A Tata Steel spokesman declined to comment.
A DWP spokeswoman said described the plan as one option being investigated by government, adding: “We will come back and report on our findings in due course.”
A spokesman for British Steel Pension Scheme trustees declined to comment, but only yesterday the trustee board was still pushing for the plan to disapply the relevant section of the 1995 legislation.
In a statement issued as Tata declared a net loss of £358m, Allan Johnston, chairman of the trustee board of the British Steel Pension Scheme, said: "The disapplication of Section 67 continues to be our preferred option and we expect to have further discussions with government before any decision is taken on the consultation outcome."