If you have a railway pension, this subject probably matters more to you than anything else in this issue of RailReview. The Pensions Regulator thinks your retirement pot needs a lot more money pumped into it. And that money comes 60% from your employer, and 40% from you.
If the result is a large increase in contributions, it is going to hit your pocket quite hard. Some employers think their contributions could be so onerous it would put them out of business.
Stagecoach was evicted from three franchise competitions because it declined to accept the risk of taking on unknown future pension contributions over which it had no control. Stagecoach then launched legal action against the Department for Transport over its disqualification.
Within days, Arriva also launched legal action over the way it was ejected from the East Midlands franchise. And the RMT has threatened a national strike if members’ pensions are not maintained.
A senior industry source says: “This is the Department for Transport going through the back door to cut the cost of a gold-plated pension. It’s a ‘defined benefits’ scheme that’s still open to new members and there aren’t many of them left.
“Instead of having a grown-up discussion with the trade unions about this and being up front with the fact that they want to cut the cost, they’ve decided to link it to franchising, so essentially all the risk transfers to the private sector instead.”
The Rail Delivery Group has informed the Department for Transport that, unless a solution can be found, the pension black hole is sufficient to derail franchising altogether, regardless of what the Williams Review may do.
Talk to the freight operators and private companies that run chunks of the former British Rail engineering businesses, and they see the pension deficit as a problem so huge that it could derail their businesses entirely.
“The bottom line is that the risk mechanism in recent bids doesn’t cover what would have to happen in terms of employee contributions,” said a source. “If the employees threaten to strike over any tampering with the scheme, the employer would end up funding the gap. Because the Pensions Regulator is independent of Government, it can do whatever it wants. It can insist the deficits are plugged, over whatever timescale it chooses.
“This lays bare that the heart of this is an issue in Government. It is not of the rail industry’s making; it’s the Government trying to be cute with its finances. And that has really spooked the Regulator, because in the past it knew the Government stood behind the franchises.”
There’s a wide range of opinion on this. The drivers’ union, ASLEF, thinks the pension pots of passenger train operators are in pretty good health. ASLEF argues that the Pensions Regulator has got the wrong end of the stick in treating it as a private pension fund; with passenger services underwritten by Government, the drivers’ union says it is effectively a public-sector pension.
The basics
The Railways Pension Scheme (RPS) has 350,000 members, of whom 99,000 are active and paying into the scheme. It is one of the country’s ten largest pension funds. At the end of 2018, it had assets of £28.2 billion and paid a little over £1bn in benefits in the year.
The fund is divided into 107 separate sections across the industry. The largest is Network Rail with 48,000 members, of whom 23,000 are active. They have assets of £7bn.
The chairman of the Railway Pensions Trustee Company is Chris Hannon. He is also pensions director for Genesee & Wyoming, the owner of Freightliner, having previously held a similar role at Network Rail.
“The RPS was spun out of the British Rail pension scheme at the time of privatisation in 1994. Where there was one pension under BR, it was split into lots of different sections. They each have their own independent section of the overall scheme,” says Hannon.
“If you think of the RPS as a cake, there are 107 slices. Each is managed like a separate scheme within the whole. The specific package for each section differs as a result of changes in membership, investments and funding. So some sections will be open to new members for defined benefits, and some sections may have closed to new members.”
The RPS is unusual these days in providing defined benefits and being open to new members. It is also unusual in having a shared cost arrangement in which members contribute on a varying basis over time, depending on the cost and funding of the section.
There is one common administration, which is still based at the old BR pensions office in Darlington, with another office in London. The Railway Pension Trustee Company looks after all the sections of the RPS. It is made up of 16 directors. Half are employer nominated and half are nominated by members. Train operating companies, freight and engineering firms, unions and pensioners are all represented.
Beneath that are two subsidiaries: RPMI and RMPI Railpen. They have about 350 people running the pension scheme.
The Pensions Regulator has identified a potential shortfall in the RPS that has risen from £4.8bn to £7.3bn in the three years between 2013 and 2016. It wants increased payments to counteract the shortfall. Yet every passenger train operator and Network Rail, which together make up a majority of the industry, say their sections are each in surplus. Network Rail says its section has “a very healthy funding position” and “we do not expect any material change”.
Hannon says: “You ask me about the numbers that have been reported as Pensions Regulator identified deficit. These are not Trustee numbers. I cannot say more. Pensions in payment continue to be paid in full.”
The trustees recognise, he says, that hundreds of thousands of people depend on their judgment of what is prudent. Hannon is keen to stress that “prudence” is the watchword behind every trustee decision, and is based on years of “intimate familiarity” with the scheme and understanding of the industry.
In a letter sent last June during discussions with the industry about a possible funding solution, the Pensions Regulator said the deficit “drives our desire to ensure substantially more cash is paid into the sections, commencing in the short term”. It added that the DfT “has remained consistent that the schemes are sponsored by private companies that must take responsibility”.
The BBC reported that the letter was sent to Calum Cooper, a partner in the pensions consultancy Hymans, which has been advising the Rail Delivery Group.
Led by the RDG, the industry put forward a compromise that would see train operators contributing an additional £600 million over a decade. The Government would take up the rest.
On April 24, there was a meeting between RDG, the Department for Transport, the Pensions Regulator and RPMI. A source says that, at this meeting, the Regulator stated that the only credible solution offered was the one put forward by the industry.
That proposal had been submitted to the Department for Transport one year earlier. During that year, the source said there had been no formal response from the Government. “We do not know why they have not come back to us with a detailed proposal,” said the source.
Stagecoach
The pension debate was publicly ignited on April 10, when Stagecoach announced it had been disqualified from three franchise bids. It lost East Midlands to Abellio. For South Eastern, it was bidding with Alstom. And for West Coast Partnership, it was bidding with Virgin and SNCF.
It raised the prospect of both the Stagecoach and Virgin names disappearing from the industry within months – East Midlands Trains finishes in August and West Coast in November.
Stagecoach said at the time: “A senior Department for Transport official verbally advised that we had been excluded from all three competitions for submitting non-compliant bids, principally in respect of pensions risk.”
In May, the company offered more detail in an announcement to the London Stock Exchange. It said that in its bids, it had refused to accept the potential pension risks that the Department for Transport requires operators to bear. It said: “The full extent of these risks is unknown, but we estimate them to be well in excess of £1bn.”
It then launched legal action against the Department for Transport over its disqualification from the East Midlands franchise competition. In a claim issued at the High Court, Stagecoach alleged that the DfT “breached its statutory duties”.
Group Chief Executive Martin Griffiths said: “Despite our continued requests for full transparency around these matters, many fundamental questions remain unanswered. We have had no option but to commence legal action to ensure the DfT’s opaque decision-making is subject to proper public scrutiny.”
Stagecoach also prepared a claim for a Judicial Review over the East Midlands decision and was considering further legal action against the DfT over the South Eastern and West Coast Partnership franchises.
A few days later, Arriva confirmed that it too had launched legal action over the way it was excluded from the East Midlands franchise competition.
This was the latest of several legal actions against the contractual decisions made by the Department for Transport this year. Eurotunnel sued the DfT over the way it let contracts for additional cross-Channel ferry services to cope with the consequences of a no-deal Brexit. Eurotunnel argued that the process was anti-competitive. The DfT settled out of court for £33 million. Subsequently the ferry firm P&O also sued the DfT, arguing that the £33m paid to Eurotunnel was itself unfair and anti-competitive.
A Department for Transport spokesman responded: “We have total confidence in our franchise competition process and will robustly defend decisions that were taken fairly.”
Stagecoach said that since privatisation, the train operator’s obligation to the RPS had been limited to paying the employer contributions during the franchise. No train operator had been held responsible for any deficit remaining at the end of the franchise, nor had any train operator been entitled to benefit from any surplus at the end of the franchise.
It told the Stock Exchange: “That funding approach was determined by the RPS Trustee Board, taking comfort from its understanding that the Department for Transport effectively stands behind any RPS liabilities as each franchise ends.
“More recently, the Pensions Regulator has questioned the extent to which RPS does in fact benefit from that underpinning support. We understand that the Pensions Regulator considers there to be a deficit of up to £7.5bn across the franchised train operators and is seeking significant additional contributions which are as yet unquantified.”
The DfT’s protection was limited to the 2019 valuation of the pension scheme only. So the company would have taken the full risk of any increased contributions following the next valuation of the pension scheme, due in 2022. It would also have to accept the risk that employees might not accept increased pension contributions, leading either to industrial action or to a need for the operator to fund their increases.
To have accepted that risk, said Stagecoach, would have been “contrary to the success of the company and also contrary to the interests of employees, customers and the franchise”.
It included pension increases in its bid forecast, but sought additional protection beyond what the DfT had offered, “to ensure… increases in pension contributions would be limited to a manageable level which it would be reasonable for a train operator to bear”. It added that Virgin, SNCF and Alstom supported this position.
The Department maintained that Abellio had been the only compliant bidder for East Midlands. Subsequently Labour’s shadow Transport Secretary, Andy McDonald, told MPs that Abellio’s bid had also been non-compliant, and accused Transport Secretary Chris Grayling of misleading Parliament.
Grayling was obliged to respond to a series of detailed questions on the Department’s choices. They were contained in a joint letter from the chairs of the Transport and Work & Pensions Select Committees, Lilian Greenwood and Frank Field, both Labour MPs.
