New calculations showing an £11bn deficit for the Railways Pension Scheme have been dismissed by the National Union of Rail, Maritime and Transport Workers, which has promised industrial action if new measures to plug the gap are imposed without negotiation.
John Ralfe, an independent pensions consultant, analysed the individual accounts of each company sponsoring one of the 112 sections of RPS – with the exclusion of those that have a crown guarantee – concluding that the scheme has pension liabilities defined under International Accounting Standard 19 of around £35bn, compared with £24bn of assets, resulting in an £11bn deficit.
RPS is one of the UK’s largest pension schemes, with £27bn of assets at December 2018, and 344,000 members, including almost 96,000 current employees.
From these, around 102,000 individuals are in sections backed by a crown guarantee, set up when the pension fund was created in 1994, and which secures the payment of future liabilities in case of wind-up.
The valuation is on the books and it is in surplus, but TPR is insisting that it is seen through a different lens, which puts it back into deficit
Mick Lynch, RMT
“Because the deficit is understated, RPS deficit contributions are also understated. To pay off the £11bn deficit over 10 years, which is longer than the UK average, annual deficit contributions of more than £1bn are needed, compared with the current amount of just £60m,” Mr Ralfe said, in an opinion article in the Financial Times.
Deficit calculated using accounting measures
Mr Ralfe’s figures are higher than the last estimate from the Pensions Regulator – a deficit of £7.5bn in June 2018 – which were publicised when former chair of the Work and Pensions select committee, Frank Field, questioned the watchdog’s work to reduce such a shortfall.
The £11bn shortfall is based on an accounting deficit, which uses an AA corporate bond discount rate.
However, the contributions required from the companies are dictated by the technical provisions deficit calculated at a triennial valuation, which involves the returns expected on the assets that the scheme actually invests in – not just corporate bonds – and so can be higher or lower than the accounting deficit.
According to the latest actuarial valuation in December 2016, which involved 70 sections of the scheme, the RPS has £10.7bn in liabilities and £10.9bn in assets.
Mr Ralfe said: “RPS uses the ‘actuary’s magic pencil’ to shrink pension liabilities, a discount rate based on the ‘expected return on assets’ not a AA corporate bond rate.
“Much of RPS’s deficit is self-inflicted. It has taken a huge equity bet for many years and lost. With 80 per cent of its portfolio in equities, it is way out of line with other pension schemes.”
A spokesperson for the RPS Trustees said: “The RPS is well run and managed by the trustee and its executive. The trustee is committed to trying to resolve TPR’s concerns and is supporting a train operating company section-wide solution process that is acceptable to all sides as soon as possible.”
Mr Ralfe explained that RPS has a unique cost-sharing arrangement, with all regular and deficit cash contributions split 60:40 between employers and employees, so employees are on the hook for part of the deficit.
According to RPS’s 2018 annual report, members contributed £10m towards deficit contributions, while employers paid £47m.
Union criticises regulator
In an interview with BBC 4’s Today programme, Mick Lynch, RMT’s assistant general secretary, argued that the scheme is not in trouble and that the regulator has intervened unnecessarily.
He said: “Because TPR itself is an advocate of closing final salary schemes, the trustee regards all these sections as being in surplus, but they have been prevented from declaring that because they [TPR] do not want any risk in the market, they want to close all final salary schemes.
“This scheme is paying millions of pounds a year in benefits, supporting 250,000 pensioners and can continue to do that if we get a sensible approach to the valuation. The valuation is on the books and it is in surplus, but TPR is insisting that it is seen through a different lens, which puts it back into deficit.”
Select committee turns focus to Railways Pension Scheme deficit
The Work and Pensions Committee has written to the Pensions Regulator over what it called the “staggering, parlous state” of the Railways Pension Scheme.
In response, a spokesperson for TPR said: “We are working closely with the scheme trustees, Rail Delivery Group and the Department for Transport, to ensure the best possible outcome for pension scheme savers. This work is to ensure the scheme is adequately funded so that members receive the benefits they expect.
“We want all workplace pension schemes, including defined benefit arrangements, to recognise the risks that relate to their scheme, and then to manage, address and mitigate them appropriately to protect their members.”
Mr Lynch noted that if changes to the scheme are needed, these should be negotiated with the union.
He said: “[If there is an attempt to reduce benefits] there will be a dispute. We will talk to everybody in the industry. There are a lot of players in this – there are 28 sections in the talks, 112 sections in the scheme entirely.
“We will make changes through negotiation if it needs to be as we have done in the past, but if there is imposition, and people seek to cut our members income through to their old age, we will resist that and there will be strike action and support.”
