In this, he claimed that bidders for franchises were “well aware of the Pension Regulator’s concerns in advance of the issue of the Invitation to Tender”. That was in October 2018.
In the letter, Grayling wrote: “The Stagecoach bid was non-compliant with subsection 4.1.2 which states that ‘The Department expects to receive Bids that contain no qualifications.’” He concedes that there were numerous concerns from South Eastern bidders in relation to pensions, which led to an invitation to resubmit pension-specific elements of their bids separately last autumn.
He also said: “On all previous franchise competitions, the Department has required TOCs to be fully liable for their share of pensions contributions, and for the risk of those contributions changing, during their franchise term. This includes any increase to future service or deficit contributions that arise during the franchise term.
“The approach adopted on East Midlands, South Eastern and West Coast Partnership competitions mean that the TOC will be exposed to no additional risks or demands when compared to current TOCs.”
He went on to suggest that the risk would in fact be lower than on other franchises, because his department will share some of the pension deficit risk under a new mechanism. And he claimed: “Pension costs are a relatively small part of a TOC’s revenues and operating costs.”
Passenger train operators – and unions
The Department for Transport cannot have been in any doubt about the potential impact of its choices.
On April 1, RDG Chief Executive Paul Plummer wrote to Rail Minister Andrew Jones. It was his second communication on the subject within a month. It was a private letter, but it has since been leaked.
It referred to a proposed risk-sharing format in which train operators would increase pension contributions. This, wrote Plummer, would “provide the Pension Regulator, trustees and employers with documented support against unexpected outlier events. ” In other words, it would confirm that pensions are, in effect, backed by the Government.
Plummer was blunt in the letter: “…if it is not supported by Government we believe the consequences for taxpayers and customers are clear.”
He detailed those consequences:
- “Contribution increases would be significant and we believe they could break the scheme.
- “There could be a very significant impact on the taxpayer through the adverse financial effect on franchise bids.
- “The ability for the DfT to let future franchises in circumstances of such uncertainty will be put in jeopardy, whatever the outcome of the Williams Review.
- “Stakeholder support will evaporate leading to lengthy and costly legal disputes.
- “There would almost certainly be widespread industrial action.”
This letter came nine days before Stagecoach was ejected from the franchising process.
ASLEF has an employee director on the Railways Pension Scheme. Unusually, it says there is no difference in approach between employers and employees when it comes to the pension fund.
Because the RPS is a shared cost scheme, the union has a strong reason to make sure contributions for both employer and employee remain affordable. Employees generally pick up 40% of any increase, sufficient to make a significant dent in their income, though some employers pay more than 60%.
ASLEF takes issue with the view of the Pension Regulator, claiming it fundamentally misunderstands the nature of the industry. Its spokesman, who prefers not to be named in this article, says: “We reject the premise that there is a problem. Nothing has fundamentally changed since privatisation.
“The RPS is unique in that the employers are short-term and have few assets. On paper they don’t look strong employers. But the state is always the operator of last resort. The actuaries and us have always seen it as a secure scheme with long-term interests. The state will continue the employment of scheme members and the operation of the TOC if it falls into trouble.”
The ASLEF spokeman added that the RPS was secure. “It isn’t seen as weak,” he says. “And there’s evidence: the failure of East Coast several times, and the earlier failure of Connex, show the Government has always picked up.
“The results we have from 2016 show every TOC fund is in surplus. The Regulator has said that we need to knock down the valuation by about 25%, as this is a private fund and the employers are not strong. That would throw pretty much all the funds into deficit.”
But he adds that this is a long-term growth industry. “We are building new lines and employing more people,” he says. “New people are coming into the scheme. It is not stagnant. Employers and unions are not often on the same side, but on this we are singing from the same hymn sheet. We think the pension scheme is sound.”
ASLEF is saying that the Regulator has got this wrong. “Employers come and go, but the employment itself is stable,” its spokesman adds. “These are Government contracts and ultimately they will continue one way or another. The trains won’t stop running, and that is enshrined in the 1993 Railways Act.”
The freight and engineering companies
“The only healthy pension is one that is supported by a healthy business, one that can afford the contribution rates,” says the head of a prominent private sector rail business. “If these contribution rates are continually going up, then we can’t afford it. It wipes millions off the bottom line and it will bankrupt the business.”
He explains that the valuation the pension fund puts on its investments is “way off the scale” compared with where it should normally be. Other pension funds, he says, take a more pessimistic view of how their investments will perform. The RPS assumes a higher rate of return.
“They look at the money coming in and the money going out. How many people are paying in, the age profile of contributors and the average age at death of people in the scheme. They’ve got railway people dying at an average age of 92, which is highly unlikely. These are the things you twiddle with in order to adjust the value of the deficit.
“Now we are being told our contributions are going up on this overly optimistic view, to levels that are just not affordable for a private business to sustain.”
Another source said that the driver-only operation controversy pales into insignificance compared with pensions. “The pension deficit is the biggest problem facing the industry right now,” he says. “If you’re going to have a strike, have it about the pension scheme. It is far more important to the long-term health of the industry, and therefore to the welfare of the people who work in it.”
He adds that the RPS is not a public pension scheme, but a private one. “And that is what has dawned on the DfT,” he says. “If Labour get in and nationalise the whole thing, the deficit that goes on the Treasury’s balance sheet is massive. It far outweighs any negotiations on the future of franchises.”
Pension providers give businesses a Covenant Level, ranked from one to five, with one being the best. These levels are based around a company’s performance. The worse a company performs, the more the pension fund demands is put into the pot.
“The key thing with the TOCs is that they are all Covenant Level 1,” says this source. “They are seen as Government guaranteed, because the liability goes back to the Government at the end of a franchise. We have to account for the deficit on our balance sheet, so our Covenant Level is lower. But for them it never comes home to roost. That’s why ASLEF agrees with the TOCs.”
He says that all the contractor businesses like Balfour Beatty and Colas, the people who took on parts of the former BR, and all the freight operators, now have this cross to bear.
“If you talk to any of the private businesses that have to suffer this pension scheme, you will find we are all extremely vexed and stressed by it,” he says.
“Some of the private companies are gently winding down their schemes. They won’t admit it to you. But they are not letting new recruits join their final salary scheme unless they have been in the railway since before 1995.
“And some firms simply don’t recruit people who are pre-1995. This is why: they have to reduce their membership of the scheme to get their exposure down to a survivable level.”
