UK transport operator Stagecoach has explained its decision to not take on "well in excess of £1bn" in pension risks as part of a franchise bid.
In a statement to the London Stock Exchange on May 2, Stagecoach explained the risks of taking on the pension liability of the franchised train operators which included "exposure to substantial additional pension contributions".
Stagecoach estimated it could have had to pay out £1.6bn in pensions liability, which included £691m on one franchise alone.
Due to the company being unwilling to accept these pension risks, on April 10 the Department for Transport disqualified it from a total of three franchise bids.
Stagecoach stated that accepting the DfT’s pensions position would have resulted in "unknowable risk and been contrary to the success of the company and also contrary to the interests of employees, customers and the franchise".
The franchise bids included:
- East Midlands, where Stagecoach was bidding independently;
- South Eastern, where Stagecoach was bidding with support from Alstom; and
- West Coast Partnership, where Stagecoach was part of a joint bid with Virgin Group and SNCF.
The railways pension scheme is a defined benefit scheme split into a number of sections which cover the franchised train operating companies.
The sections operate on a shared cost basis with the employer responsible for 60 per cent of the total contributions payable to the scheme and the employees responsible for 40 per cent.
The privatisation of the UK railway in the 1990s resulted in a franchised train operator's obligation to the railway pension scheme being limited to paying the employer contributions due for the period of its franchise with no operator being held responsible for any scheme deficit at the end of the franchise.
As a result of this Stagecoach stated that in the absence of any protection in the contract, an operator of a new rail franchise could have an exposure to substantial additional pension contributions.
Stagecoach said: "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 to the scheme which are as yet unquantified."
Frank Field requested that the regulator reports on the extent of the final salary scheme’s deficit, and TPR’s actions and future plans to work with firms and the Department for Transport to address this shortfall.