Network Rail Pension Arrangements – Valuation of the Railways Pension Scheme as at 31st December 2007

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Circular No. NP004/09
12th January 2009

Dear Colleague,

Network Rail Pension Arrangements – Valuation of the Railways Pension Scheme as at 31st December 2007

Discussions have taken place with Management regarding the valuation of the Network Rail Section of the Railways Pension Scheme.

The Actuary’s final report as at 31st December 2007, revealed a shortfall of £110m giving a funding level of 97%. The report also revealed that the member contribution rate necessary to purchase future benefits is 11.32%, but a further 1.14% would be required over the next nine years to offset the deficit; giving a future rate of 12.46% with effect from 1st July 2009.

However, in view of the fact that contributions would increase from 10.8% to 11.36% wef 1st January 2009, RMT and our other TU colleagues were concerned that a further increase to such a high level would prove to be unaffordable for many, which in turn could result in members dropping out with a consequential adverse impact on the Section followed by even higher contributions for those remaining.

Discussions therefore took place with management at the Pensions Forum with a view to identifying potential areas which would reduce the contribution rate to a more affordable level. Those discussions focused on introducing ‘cost neutral’ early retirement factors for future service accrued by non-protected employees and new recruits, to replace the existing favourable factors which result in the pensions of members drawing benefits before age 60 being subsidised by those who remain.

Management initially proposed that upon the introduction of revised early retirement factors the Section would be valued as two separate entities, ie protected and non-protected. However, this would have increased the protected member’s contribution rate to 14.14% with a non-protected rate of 11.14%. RMT argued that we were not prepared to accept a change which resulted in an increase in members’ costs. We therefore asked management to provide details of the rate payable if the Section continued to be valued as a single unit and this was revealed to 11.6%.

Our discussions have now been finalised and the following changes agreed by the majority of the trade unions and put forward as a recommendation to the RPS Trustees, who agreed in principle to them on 8 January:

  1. Introduce cost neutral early retirement factors for non-protected active members, for future service only, with effect from 1 July 2009,
  2. Require future Brass contributions to be taken as cash, rather than pension at 12:1 for all members (with an option for members' past contributions also to be taken as cash if they wish, subject to normal benefit limits)
  3. Removal of favourable early retirement terms for deferred pensioners.

As a result, members’ contributions will be restricted 11.6% with effect from 1 July 2009 and 17.4% for the company, subject of course to adjustment at future actuarial valuations.

I would stress that items one and two above are in respect of future service only and that past service entitlements are protected. With regard to the Brass change, I would point out that historically the RPS only allowed Brass to be taken as cash but shortly after privatisation Railtrack introduced a change which allowed Brass funds to be taken as additional pension at a cost of 12:1. However, purchasing pension at 12:1 results in a large cross subsidy for those able to pay substantial sums into their Brass fund. This change addresses that inequity.

In order to comply with legislation management will now commence a 60 day consultation period in respect of these changes.

Yours sincerely,

Bob Crow
General Secretary