Defined Benefit 

Government defends Railways pensions

Government defends Railways pensions

The secretary of state for Transport has defended the decision to disqualify Stagecoach from three franchise bids due to pension issues and said franchise holders will continue to be responsible for any pension deficits.

In a letter responding to questions on the Railways pension scheme from MPs Frank Field, chair of the Work and Pensions Committee, and Lilian Greenwood, chair of the transport committee, Chris Grayling defended Transport for London’s decision in April to disqualify Stagecoach from franchise bids for refusing to accept the associated pension liability.

Since 1994 train operating companies that hold franchises have been responsible for paying employer pension contributions to their own section of the Railways pension scheme and Mr Grayling stated that "the department anticipates that this will remain the case".

But Stagecoach declined taking over the liabilities associated with three franchises it was bidding for because it estimated it could have had to pay out £1.6bn in pension liability, which included £691m on one franchise alone.

The company explained the risks of taking on the pension liability of the franchised train operators (East Midlands, South Eastern and West Coast Partnership) in a statement to the London Stock Exchange on May 2, stating they included "exposure to substantial additional pension contributions".

However, Mr Grayling clarified that this has always been the case with franchise bids and said that the train operating company would be exposed to no additional risks or demands when compared with the current train operating companies.

The letter, dated May 7, stated: "On all previous franchise competitions, the department has required train operating companies to be fully liable for their share of pensions contributions, and for the risk of those contributions changing during their franchise term.

"Train operating companies (and its employees) need to meet the contributions payable during the term of their franchise. This includes any increases to future service or deficit contributions."

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.

At the end of the franchise term the pensions obligation passes to the train operating company taking over the franchise and the outgoing company is no longer responsible for any pension deficit that built up during its term.

Mr Grayling wrote: "Pensions costs are a relatively small percentage of a train operating company’s revenues and operating costs, and the department does therefore not consider an increase in pension costs, in isolation, will materially increase the risk of default.

"This view was informed by work conducted by specialist external financial advisers."

The Railways Pensions Scheme is reported to have a deficit of £5-£6bn. 

Last month MPs questioned The Pensions Regulator about its engagement with the scheme.

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 the shortfall.