My Ref: MRP 1/8/1
28th April 2023
Circular Num: NP/079 /23
To: The Secretary All Branches & Regional Councils
Dear Colleagues,
RPS TOC SECTIONS 2016 & 2019 ACTUARIAL VALUATION – INTERVENTION BY THE PENSIONS REGULATOR
I refer to Circular NP/187/22, 2nd September 2022, as I have previously reported due to the Pensions Regulators (TPR) intervention into the 2016 Actuarial Valuation of TOC sections, neither the 2016 nor the 2019 valuations have been completed. Indeed, due to the ongoing discussions between TPR and the Trustees of the RPS the 2022 Actuarial Valuation will likely be signed off at the same time as the previous two valuations.
The delay you will recall has been caused by the perception of TPR that Train Operators are not as financially secure as the Trustees of the RPS have rated them. Because of this belief, TPR has instructed the Trustees to review the assumptions which were being considered for the 2016, 2019 and the current 2022 actuarial valuations.
In particular because of TPR’s stance in respect of the employer covenant i.e. the strength of the employers’ financial balance sheet and the chances of them defaulting on their pension obligations, TPR has insisted that the RPS Trustees review their investment structure as they believe that the current strategy takes on too much risk which is linked to the employers’ covenant rating. TPR has therefore insisted that Discount Rate assumptions, the anticipated investment returns going forward, are reduced so that the liabilities (benefits) of TOC sections are increased by 25%.
In effect if the liabilities were increased by 25% and a scheme which would have been 105% funded in 2019 would now be funded at 80%, which would mean there is a deficit of 20%. This would lead to higher contributions for both members and the employer.
We were advised that to address TPR demands the average joint contribution rate for a TOC section could increase by 15%, from 19% to around 34% of Section Pay. Members on average could see their contributions increase by up to 7.6%. Such an increase would clearly be unaffordable and indeed unacceptable to many of our TOC members.
As we had previously reported the RMT and our sister unions have been in discussions through the joint Informal Pension Steering Group (IPSG) with the aim of finding a solution which would allow both the 2016, 2019 and 2022 valuation to be signed off and in turn protect members from the significant contribution increases.
Stemming from IPSG meeting in August 2022 you will recall that the following proposal was made by management which they believed would maintain contributions at an affordable level. However, our view was these proposals only served TOC employers at the expense of member future benefits. The proposals made by management were:
• The Normal Pension Age to increase from 62 to 65 for future service from 1st February 2023 for all non-protected members.
• Past service Pensionable Pay cap of CPI per annum for all members with any increases above the cap being pensionable for future service only a 2-year waiting period for new entrants without RPS membership.
• New employees would join the Industry Wide Defined Contribution Pension scheme for the 2-year waiting period.
While management were keen to put these proposals into place the RMT were of the view that none of the above proposals were acceptable to this union, but our representatives took their time to consider their strategy to protect our members benefits.
In consideration the RMT initiated, with the support of some of our sister unions, its own actuarial advice because considering the pending RPS 31st December 2022 Actuarial Valuation making any detrimental changes to member benefits could be, and indeed was proven to be, unnecessary.
Our Actuary engaged with the RPS in respect of the forthcoming 2022 valuation and believed the results of TOC sections once published would be positive in that it was unlikely that any changes to members benefits would be necessary. This positivity was also taking into consideration TPR demands that the RPS investment portfolio is de-risked, and that liabilities are increased by 25%. The reason for our Actuary’s optimism was based on the increase to gilt yields during the backend of 2022, which had reduced the cost of liabilities (benefits), and the positive returns on investments.
I can report that in 2023 the draft results of the 31st December 2022 Actuarial Valuation revealed that the average funding level of TOC sections is 113% with an average Future Service Joint Contribution Rate of 18.3% which is approximately 1% lower than current rates. These initial results are using the demands made by TPR.
As a result of these positive results most TOC sections will see a reduction in future service joint contributions although approximately six sections may see an increase to their contributions. However, none of the IPSG proposals will need to be implemented which is clearly good news.
However, following a IPSG meeting held on 20th March 2023 management asked the Trade Unions to consider and have a position on the following questions:
- Do the TU’s except TPR’s demands in respect of the de-risking and increase to liabilities?
- Should the IPSG carry on/proceed with the proposed original IPSG framework?
- Should the framework be scrapped or amended to reflect better than anticipated 2022 valuation results or “stowed” in the event of lower-than-expected future valuation results?
- In terms of contributions following the 2022 valuation results is there any merit in having a minimum floor for contribution levels/rates to build some additional contingency for a future potential adverse valuation result in those sections to which they would apply?
I can report that our representatives meet with our sister unions on 11th April 2023 where it was agreed that the following approach was considered and agreed in relation to the questions above:
• That there is no need to proceed with any changes to member benefits as outlined in the IPSG framework, including adjusting the past service pensionable pay cap to CPI.
• Future contributions should be applied in accordance with the results of individual TOC section's valuation results and not adjusted to allow for a contingency through members having to pay increased subscriptions beyond those results. The Trade Union view is that this would have the effect of penalising those members having to pay more at a time of a cost of living crisis.
• The valuations should be carried out in accordance with the usual approach taken by the Trustee and not be adjusted to allow for the reduced risk demanded by TPR. We believe TPR does not understand the Railway Industry and the Operator of last resort requirements within the Railways Act 1993. We also know that the Trustee does not act imprudently in assessing risk in its investment strategy.
• The work that has been carried out to put the IPSG proposal together should be stowed for future discussion between employers and Trade Unions should deficit arise in the future.
While it is arguable that circumstances were a contributing factor in reaching this position it is clear to this union that TPR does not understand the rail industry. While some of the franchise holders may not be as financially strong as the Covenant Rating indicates, the reality is that in the event of a franchise holder defaulting the Government would step in as they have done on the East Coast Mainline on more than one occasion to protect members’ pensions and avoid the scheme being placed in the PPF.
It is clear that the only remedy to protect our members pensions across the RPS is the full nationalisation of the railways and until this aim is achieved, we will continue to defend our members deferred wages.
I will keep you informed of developments.
Yours sincerely
Michael Lynch
General Secretary