Robbing Peter to Pay for Paul - Pension Act 2014 - Ending Of Contracting-Out
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My Ref: MRP 1/8/1
16th February 2015
Circular Num: NP/025 /15
To: The Secretary All Branches & Regional Councils
Robbing Peter to Pay for Paul -
Pension Act 2014 - Ending Of Contracting-Out
I refer to the previous Circular NP/037/14 13th February 2014, as you will recall as part of the Governments state pension reforms as from 6th April 2016 a new Single-Tier State Pension (STSP) will be introduced which will replace the existing Basic State Pension and the State Second Pension for those retiring after this date.
The present Basic State Pension is £113.10 per week for a single person and it is anticipated that this new STSP will be set at around £144 per week. As part of these reforms the Government will also increase the normal State Pension Age from 65 to 67, eventually increasing to 68.
While the Government have gone to great lengths to claim that the STSP will be fairer and offer future pensioners a bigger pension at retirement they have failed to recognise that this will be at the expense of members in company pension schemes which are presently Contracted - Out.
Under the present pension system occupational pension schemes such as the Railways Pension Scheme (RPS) can opt-out (Contract-Out) of the State Second Pension. As a result members receive a National Insurance Contribution (NIC) rebate worth 1.4% and employers 3.4%.
As from 6th April 2016 this rebate will no longer exist which will mean that pension scheme members will see an increase in their NICs (1.4%) and therefore a reduction in their take home pay.
However, while members will have to take this increase in NICs "on the chin" the Government are introducing overriding legislation which will allow employers to recoup their entire 3.4% NIC rebate without the need of trustee consent. What this means is that employers after taking actuarial advice can change members' future service benefits, up to 3.4%, or/and increase their pension contributions without the need to get agreement from the trustees.
Initially the Government proposed to introduce an override which would have allowed employers to recoup their rebate from those individual members who have statutory protection in relation to pensions. These members being those employed on the railways prior to privatisation.
Following pressure from rail unions the Government has now backed off this proposal. However, while this is a victory for those members who are protected the Government is still intent in allowing employers the right to recoup their rebate from non-protected persons via the Trustee Consent Override route.
While employers will receive "special treatment" allowing them a free hand to recoup their rebate, members could see any state pension gains wiped out by having their occupational benefits reduced for future service.
The Government have stated that this override should only be used as "a last resort where the only other option is to close the scheme", however, employers are already setting themselves up to raid pension funds to claw back, what they see as, their money.
We are aware through the RPS Informal Pension Working Group, which is made up of Train Operating Companies (TOC) and rail unions, that employers want to recoup the extra cost associated to Contracting-Out by reducing members' future benefits.
Management have stated that to recoup the anticipated £49 million additional annual payroll costs benefit such as accrual rates, aligning the normal retirement age of the RPS with the state pension age (60 to 68) and changing early retirement reduction factors would need to change. These proposals have been made despite many of the TOC sections being well funded.
The increase in NICs is taxation by stealth. While the Government claim that individuals of Contracted-Out pension schemes will be compensated by a larger state pension it is these very members who will be funding this policy at the expense of increased NICs and reduced future occupational benefits. What the Government is clearly doing is "robbing Peter to pay for Paul".
Rail unions have recently met to discuss a joint strategy to protect our members' future pension rights. While we are more than aware that employers may use the Trustee Consent Override to force through their proposals, at this time discussions are ongoing and it is hoped that a satisfactory outcome can be found.
I will keep you informed of developments.