Network Rail CARE Pension Scheme
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Circular No. NP147/08
4th November 2008
Network Rail CARE Pension Scheme (MRP/1/8)
Network Rail has written to every employee giving details of the new career average pension scheme which commenced on 1st November 2008. The pack includes application forms for the new scheme and I am very concerned that this may encourage existing Railways Pension Scheme (RPS) members to transfer into the CARE arrangement without fully appreciating the serious implications involved.
I would therefore stress that the CARE Scheme has not been agreed with the Unions. RMT wants the Railways Scheme to be open for everyone and to negotiate an arrangement which does not disadvantage anyone. I would also stress that if you contribute to the Railways Pension Scheme and wish to remain a member you need do nothing. Members who are considering moving to the CARE Scheme should not do so without first having taken advice from a registered independent financial adviser.
Whilst CARE contributions appear lower than the RPS rate, this is not always the case as the headline rate of 7.2% is calculated on a higher base than the RPS rate of 11.38%. It is imperative to also consider the actual pension derived from the contributions. The pension obtained from the CARE scheme is very sensitive to pay increases and inflation. Management's examples use inflation at 2.5% - half the current rate.
One of the more important issues which the Network Rail letter fails to emphasise strongly enough is that RPS transferees will lose future BRASS matching. Therefore whilst management has provided a comparison of benefits there is no indication of the long term cost of losing BRASS matching. In addition Network Rail also fail to point out the significant impact promotions can have on an individual’s pension entitlement in a final salary scheme. For RPS members promotions count for all pensionable service right back to the date of joining the scheme but, in a CARE scheme where each year is taken as a separate entity, promotions only impact on service after advancement and therefore do not have anywhere near the same impact on benefit entitlement.
RMT believes insufficient emphasis has been given to the fact that the CARE scheme's minimum retirement age is 65, compared to 60 for the RPS. This means that any RPS transferees would be giving up the right to retire before age 65 without a reduction in their pension. This reduction would only affect future service but it is an important issue and becomes more so the longer an individual is from retirement.
Another important benefit where the CARE scheme is inferior to the RPS is index-linking when pensions are in payment. In the RPS pensions are increased annually by RPI, regardless of whether inflation is 2% or 10%, whereas CARE increases are RPI but capped at 5%. But the 5% could be reduced at a later date because somewhat alarmingly management's demonstration CD talks of RPI index-linking for the CARE scheme as being 'currently 5%'. This suggests that it will be reviewed in the future, and as Government has recently introduced legislation to reduce the minimum index-linking from 5% to 2½%, it would not be surprising if an attempt was made to reduce this very important element of pension protection.
The table below sets out the important differences between the two schemes:
|Contributions||11.36 (from 1.1.09)||7.2%|
|Pensionable Pay||Basic Pay + London/SE Alowance, less 1½x the basic state pension||Basic Pay + London/SE Alowance|
|Minimum Retirement Age||60||65|
|Indexation||Full RPI||Capped at 5%|
RMT is concerned that the way the CARE scheme has been structured and introduced will undermine the RPS and make it more costly in the future, thus resulting in a further increase in contributions. Siphoning off potential RPS members will increase the age profile of those remaining members. It will also result in contributions, which would otherwise have been invested through the RPS, being diverted elsewhere with a consequent loss in economies of scale.
Regrettably restrictions on providing financial advice mean it is not possible for RMT to advise members what action they should take. Certainly protected status members should think long and hard before giving up that status as once relinquished it can never be regained and the valuable protection provided by the Railways Act on privatisation will be lost forever.
There is no doubt that a CARE scheme is likely to be more beneficial than a DC scheme as it provides benefits based on earnings whereas the DC scheme provides only a pot of money which is dependent on the level of contributions and the vagaries of financial markets. However, RMT believes Network Rail should offer all new recruits the opportunity of joining the Railways Scheme.
The fact that Management has sent all employees an application form to join the CARE scheme reveals their real target is not merely to encourage DC scheme members into the CARE scheme, but also to persuade RPS members to join CARE, thus making considerable long term employment savings.