Pensions Act 2014 - Ending Of Contracting-Out

My Ref: MRP 1/8/1                                 18th December 2015
                                          Circular Num: NP/256 /15
To: The Secretary All Branches & Regional Councils

Dear Colleagues,

Pensions Act 2014 - Ending Of Contracting-Out

I refer to Circular NP/218/15, 4th November 2015, as I previously reported the General Grades Committee instructed me to organise a meeting with our sister unions to discuss the Informal Pension Working Group (IPWG) ending of Contracting-Out proposals.

This meeting was held on Thursday 26th November where our sister unions indicated that they would be accepting the IPWG proposals. The RMT General Grades Committee inconsideration made the following report on 1st December 2015:

“We note that a meeting of the General Secretaries and Executive Committee members of RMT, ASLEF, and TSSA was held on Thursday 26th November. A representative from Unite the Union also attended.

The meeting discussed the latest proposal from management to the IPWG.

This General Grades Committee agrees to this proposal.

We instruct the General Secretary to convey this decision to our sister unions, to arrange joint publicity with them, and to continue discussions at the IPWG.

Regional Councils, Branches and RMT Pensions Committee members to be advised.”

Please find below as instructed a joint trade union briefing note outlining the background to Contracting-Out, the final proposals and why these proposals have been agreed by the RMT and our sister unions.

I will keep you informed of developments.

Yours sincerely,


Mick Cash
General Secretary

Briefing Note: Ending of Contacting Out – TOC Agreed Proposals


On 6 April 2016 “Contracting Out” of the State Second Pension (S2P) will end. This is the practise whereby if a workplace pension meets certain criteria (benefits are generous enough), individuals are opted out of paying into the S2P. The RPS is currently contracted out. This means that the company and employees receive a National Insurance Contribution (NIC) rebate.

The government is now getting rid of the S2P and will introduce a new flat rate Single Tier State Pension. This will mean that there is nothing to opt out of and therefore contracting out will cease. In turn both members and employers will pay higher NICs. Employers will no longer receive their NIC rebate of 3.4% in respect of employee earnings between the Lower Earnings Limit (LEL) and the Upper Accrual Point (UAP). Employees will see their NIC increase by 1.4% between these two thresholds.

To help employers deal with this additional cost, the government has given them powers to impose changes to schemes to increase employee contributions or /and reduce benefits, in order to recoup the additional costs they will face. The government has introduced legislation which will allow employers to bypass trustee agreement to recoup their NIC rebate. Please note they can only recoup the additional costs associated to these changes.

The government had also consulted on overriding the Railways Act 1994 Protection Orders which would have allowed employers to change the future service benefits of those railways workers with protected status. The railway trade unions fought against this and won so that protected members will not have changes forced on them.

It became clear as a result of this legislation that difficult decisions would have to be made to try and protect our members’ pensions. Without reaching a negotiated position, the government had given employers the power to impose changes on schemes and therefore it was crucial that we tried to find a set of proposals that were agreeable to all concerned.

Following a number of meetings at the joint trade union and ATOC employer Informal Pensions Working Group (IPWG) the following proposals were agreed:

The negotiated position

The agreement that all four unions and ATOC have agreed on is as follows:

1)    Cost Neutral Early Retirement Factors move to age 62 for future accrual post April 2016. Cost neutral early retirement factors (CNERF) will be applied up to age 62 for all non-protected members. Benefits earned prior to 1 April 2016 would not be affected.

Members can still retire at the same age they had previously planned too, but benefits accrued after April will be reduced on a cost neutral basis if taken before their 62nd birthday. Previously accrued benefits will have no such reduction.  

2)    RPI +0.25% pay cap for pensionable pay. For pay reviews on or after 1 April 2016 a pensionable pay cap of RPI plus 0.25% would be applied for each year for all members. It is accepted that pension will continue to be accrued based on uncapped pensionable pay, but future increases to such pension will be subject to the annual cap. Thus, any increases above this cap will apply for future service only from the effective date.

A Pensionable Restructuring Premium (PRP) will be created for that element of the pay increase above the cap. All increases in pay above the cap will get a PRP including, for example, promotional increases (guard to driver), and development moves (year 1 to year 2 apprentices).

This change will mean that a non-pensionable element of salary will not be introduced. This will immediately lead to two savings. Firstly, the future service joint contribution rates will fall because the cap will reduce costs. Secondly, built in assumptions on pay increases from past valuations are higher than the cap, therefore reducing liabilities.

This releases a certain amount of cash in funds. This past service credit release (PSCR) that will result from the RPI+0.25% cap will be released gradually over a period of time and will be used to reduce the contributions evenly over 12 years or more.  

3)    The legal advice given is that members with the indefeasible right would not receive the same protection as protected members. We have, however, got ATOC to agree that on this matter, indefeasible rights members will be treated in the same way as protected members.

These proposals were agreed on the basis that:

1)    All Train Operators support and comply with the changes with no ATOC passenger operator pursuing its own course on this matter.

No operator will seek to make any other changes, including the use of the Statutory Override as per the Pensions Act 2014, to deal with the matter of increased National Insurance costs due to the cessation of contracting out. These changes deal with this matter completely.

While these proposals have been agreed by each participating trade union Executive it is important to note that each TOC proposal still needs to be reported back to the relevant trade union Executive Committee to maintain consistency with trade union democracy and to ensure that any proposal is in accordance with the agreement reached at the IPWG.

Union Officers, pension committee members and relevant representatives should ensure that all proposals or changes are reported back to each union’s Executive Committee.