Pensions Commission - Railways Pension Scheme
I am writing to advise you that the Railway Pensions Commission’s Final Report has been published and is available on the Commission’s website via the following link: http://www.railwaypensionscommission.org.uk/ .
The Report contains recommendations which, if introduced unchanged would significantly alter pension provision in the railway industry. Members will recall that the Commission was set up in 2006 as a result of the joint union campaign to protect benefits and restrict contribution increases to a maximum of 10.56%, arising from the deficits revealed in the 2004 actuarial valuation.
The Commission’s Terms of Reference were:
Against a background of rising costs of pension provision, the perceived constraints of the current Railway Pension Scheme and the rail unions' pension campaign objectives, the Commission as a first step will seek to identify the strengths and weaknesses of the Scheme. It will then, in the context of the current legal framework (and taking into consideration any pending legislation) and the commercial structure of the industry, consider what, if any, alternative means of long term pension provision might be available for consideration by industry stakeholders, including consideration of structural reform, which is fair and affordable to both employees and employers.
The Report states that the rising costs of providing the current arrangements are unsustainable in the long run and, if action is not taken to address the situation, will result in employers making piecemeal changes for the future. It highlights the wholesale changes in pensions offered in the public and private sectors and says the railway industry cannot be immune from these changes.
The Commission’s Interim Report published last year dealt with the scheme’s financial development and current legal framework, and concluded that because of the increasing cost of benefits and higher contributions the RPS is not sustainable in its present form. Failing to face the reality of the situation would result in inequitable solutions as employers seek to contain their pension costs. They highlighted that many changes to the RPS had already been made, ie closure of some sections to new entrants with no transition arrangements in place to protect existing active members; the introduction of lengthy waiting periods for membership; adjustments to pensionable pay; and changes to early retirement factors.
The Final Report covers two aspects. Firstly; the action required to ensure affordable and sustainable long term pension provision and, secondly; transition arrangements so that current members do not face an increased risk.
Proposals for Reform
In setting out its proposals for new affordable arrangements for new recruits, and existing employees who wish to opt in, the Commission relies on the three criteria identified in the first report: affordability, sustainability and equity.
The Commission say that preliminary indications for the 2007 actuarial valuation suggest future contribution rates of around 30%. That would mean member contributions of 12%, and employer contributions of 18%. In addition any Sections with a deficit would have even higher contribution levels. The Commission believes this confirms the current arrangements are not affordable in the long term. The Commission therefore recommends for new recruits, a new more affordable shared cost career average scheme with a standard contribution rate of no more than 20 per cent, ie, employers’ 12%, employees 8%. However, as protection against rising costs in the future, they propose a mechanism to deal with changes such as mortality improvements, coupled with a cap on members’ contributions of 10 per cent of section pay.
The Commission expresses concern that the current scheme disadvantages the lower paid. This is because the pay of lower paid employees does not rise significantly over the lifetime of their employment and they subsidise the benefits of those who achieve salary progression to higher grades. The lower paid are also less likely to be able to afford retirement before 65, take advantage of an unreduced pension at age 60 or the attractive reduction factors for retiring earlier. However, they are unable to escape the additional costs that of those arrangements because they are required to pay 40% of all scheme costs. The Commission therefore propose a new arrangement should be established on a Average Career Revalued Earnings basis, ie benefits calculated on earnings over all pensionable service rather than earnings at retirement. In such scheme each year’s earnings are revalued each year. The Commissioners recommend that revaluation should be in line with RPI to protect value. They believe a revalued average earnings scheme allocates available resources more equitably than a final pay scheme with the same joint contribution rate.
In regard to Brass, the Commission states that surpluses set aside for matching are exhausted and both parties have to pay the full costs involved. They point out the inequity for this to continue as those who have taken advantage of Brass are now being subsidised by other scheme members.
The proposals for reform also identify changes to the existing scheme which will reduce costs, but stress there should be no change to existing basic benefits.
The Commission’s proposed changes are as follows:
Former BR Employees who have the indefeasible right:
• cessation of British Railways Additional Superannuation Scheme (BRASS);
• contribution rate to be based on retention of current RPS(sca) benefits.
Employees who joined after privatisation and without the indefeasible right:
• cessation of British Railways Additional Superannuation Scheme (BRASS);
• retirement age to increase to 65 for benefits earned in the future;
• on retirement before 65, future benefits reduced on a cost-neutral basis;
• contribution rate based on cost of providing an amended benefit structure; and
• members with indefeasible right to be able to transfer to the amended arrangements.
For new employees and others who wish to opt into it:
• a new scheme based on career average revalued earning, with the following benefits:
–one-fiftieth of the member’s revalued average earnings per year;
– Contracted-out of the State 2nd pension on basis of 1x the basic state pension;
–earnings revalued in line with the Retail Prices Index (RPI);
– benefits will be adjusted to allow for improvements in mortality;
– retirement before 65 on a cost-neutral basis;
– the ability to convert part of the pension to a lump sum;
– benefits on death and ill-health retirement;
– pensions in payment to be increased in line with the RPI up to 5% pa;
– Ill health early retirement pensions based on projected service to age 65;
– Employee contributions of 40% of costs: initially at 8% but capped at 10%;
– Calibration mechanism to offset higher future costs following improved mortality;
– Death in service lump sum of 4 times pensionable pay;
– Dependants pensions; half member’s pension with a five year guarantee
The impact on the RPS of closing the existing sections to new members would result in further increases in costs. Therefore the Commission makes several proposals to mitigate the effects of moving to new arrangements:
TOC Pensioners and Deferred Pensioners
As the new arrangements must be kept financially separate from the existing arrangements the RPS will be closed to new members, except for those with pre privatisation indefeasible rights. In order to protect the remaining RPS active members from an increase costs, the transition arrangements must provide for employers to take on greater responsibility for funding any deficit arising from pensioner related liabilities.
They therefore propose the creation of a single section for pensioners and deferred members of TOC Sections in order to prevent unacceptably high costs being passed on to the remaining active members. However, this change would require the consent of TOC employers and the Department for Transport.
Minimum Standard Pension
As significant numbers of employees in the railway industry; such as the majority of infraco staff and other contractors’ employees, do not have access to the RPS, and indeed, sometimes have no access to any pension scheme, the Commission proposes a minimum Defined Contribution (Money Purchase) standard arrangement with contributions of 5 per cent by employees and 7.5 per cent by employers.
For this minimum standard to operate effectively, however, those who award contracts, together with the Office of Rail Regulation, the DfT and the Scottish Executive, will have to allow explicitly for this standard in competitive tendering exercises to ensure that the market is not tilted against the good employer. They also recommend that in the light of this, Network Rail should revisit their Defined Contribution Scheme and the five year waiting period currently applying to their RPS Section.
The Commission concludes by stating that the report provides a way forward that is affordable, sustainable and equitable for all stakeholders, and should therefore be read in full. They strongly encourage all the stakeholders jointly to discuss the broad principles underlying their proposals.
Members will appreciate that the Report proposes fundamental changes to railway industry pensions. Moving away from a final salary scheme, increasing the retirement age to 65 and stopping Brass will not be welcomed by most sections of the workforce. However, there is no doubt that the cost of RPS benefits is continuing to rise and doing nothing could result employers taking unilateral action, or worse, members dropping out because contributions are too high. In my opinion the only way to deal with the issues raised in the Commissioner’s Report is through an industry-wide forum.
Arrangements are in hand for the TUC to co-ordinate a joint meeting of employer and Trades Union representatives to allow the Commissioners to present their report. The matter will therefore be placed before the Union’s General Grades Committee for consideration in due course. In the meantime members should be assured that every endeavour will be made to protect their long term interests.
However, I would take this opportunity to advise union negotiators that no discussions should be held on this matter pending further guidance from this Office. I would also remind RMT’s Pension Committee representatives that they should not reach agreement at their level on any changes until clearance has been received from the Office.
I shall keep you advised of developments.
January 30, 2008