Rail sector pension plan staring down £15bn black hole

The £30bn Railways Pension Scheme, which has 350,000 members, has warned in its response to the Pensions Regulator’s defined benefit funding code consultation that the change could result in a “substantial” cash hit on employers.

The damage is a possible outcome of TPR’s proposed overhaul of the range of assumptions for future returns, due to come into effect late next year. 

While at present, DB schemes enjoy a degree of flexibility over the financial assumptions used to value pension promises, the proposed changes — unveiled by the regulator in March — would see “less rosy” assumptions being used, thus inflating the cost of liabilities, the FT reported.

The watchdog has argued that the change would better protect pension rights, while making it more difficult for employers and schemes to game the system. 

But actuarial modelling prepared for the RPS suggests the alteration would result in the scheme — which is currently fully funded and provides DB pensions for more than 150 employers — finding itself with a £15bn deficit, which could only be tackled by passing the cost on to employers in the railway sector that is already struggling with the impact of coronavirus.

John Chilman, chief executive of Railway Pension Investments, which manages the RPS, told the FT: “The issue we wish to highlight is the ability for employers to cope with a substantial change to the DB funding regime via a significant level of medium-term derisking.”

Pensions Expert has reported a number of times on the various lingering concerns around the new funding code. Former pensions minister Ros Altmann told Pensions Expert in a podcastecently that she feared open DB schemes in particular would be “doomed to failure” by the new regime.

TPR, which has received more than 100 responses, told the FT it would “read those carefully before reaching any conclusions”, adding that it was “too early to tell” what the precise impact of the proposed new funding code would be.