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Great Western Railway: Changes to pensions

17 February 2016

TSSA successful in blunting legalised raid on your pension fund!

 

Great Western Railways (GWR) has made proposals to TSSA to make changes to their section of the Railways Pension Scheme (RPS). These changes are a result of provisions in the Pensions Act 2014, which introduces a Single Tier Pension (STP) from 6 April 2016, but increases the National Insurance contributions (NICs) of RPS members by 1.4% from that date.

It also increases the employer’s NICs by 3.4%, but allows GWR and other employers to raid the pension funds in order to recoup in full this additional expenditure.

TSSA and the other unions were keen to limit the extent to which train operating companies (TOCs) would exercise their legal rights to raid the pension funds. Negotiations were therefore had with the TOCs at a national level, and a national Framework Agreement was reached which limited the extent to which TOCs would recoup their extra NICs.

GWR made proposals to the unions in line with that national Framework Agreement (see below for further information).

GWR’s Proposal

In order to allow GWR to recoup some (not all) of its additional costs from increased NICs, it is making the following proposals:

· Reducing the contribution rates as follows:

GWR contribution rates to be reduced from 10.64% of salary to 8.96% for protected staff and 8.04% for non-protected staff.

Employee contribution rates to be reduced from 15.96% of salary to 13.44% for protected staff and 12.06% for non-protected staff.

· Moving the age at which benefits may be taken without reduction for early payment from 60 to 62 for all members EXCEPT protected and indefeasible rights members (around 30% of scheme members).

It should be noted that protected and indefeasible rights members will have the right to opt for the non-protected contribution rate by accepting the moving of the age at which benefits may be taken without reduction for early payment from 60 to 62. HOWEVER – TSSA strongly recommends that members are clear about the financial consequences of exercising this right and should consider taking professional financial advice before doing so.

· All future pensionable pay increases to be capped to RPI + 0.25% per annum (including promotional and merit increases) for all members, including protected and indefeasible rights members. All existing elements of pensionable pay will continue to be pensionable, but any increases in salary during a year in excess of the cap will accrue benefits for future service only.

GWR met with the TSSA full time officers to discuss its proposals on 11 February 2016, TSSA has also written to GWR to clarify outstanding questions on some of the detail but the fundamental principles of the proposals match the overarching framework agreed nationally (see below). TSSA will be running a referendum ballot of members in the near future.

The company began its statutory 60 day consultation with scheme members on Wednesday 20 January 2016 which will end on 21 March 2016.

Subject to the approval of the trade unions, GWR, the Trustees and the Scheme Actuary, the changes will take effect from 1 April 2016.

Background

The Pensions Act 2014 introduces a Single Tier Pension (STP) payable to those reaching the qualifying retirement age on and from 6 April 2016, replacing the basic State pension (BSP) and the Second State Pension (S2P). The STP has been confirmed at £155.40 per week and will be paid at that level to those that make at least 35 years worth of NICs.

The Act also ended contracting out of the S2P by final salary defined benefit (DB) pension schemes such as the Railways Pension Scheme. This contracting out meant that RPS members were entitled to the existing BSP but not the S2P (subject to their individual NI records).

Contracting out was originally introduced in 1978 to guarantee a minimum level of pension that would be paid in addition to the BSP. In exchange for the pension scheme –and not the state –guaranteeing to pay the additional pension, members and employers associated with that scheme paid lower NICs (1.4% lower for members and 3.4% lower for employers).

From the ending of contracting out this comes to an end and so RPS members will be paying the extra 1.4% in NICs through their salaries for their state pension, albeit that pension will be paid at a higher rate.

Employers will also be paying the additional amount but have been given the right under the Act to exercise a statutory override which means that they can bypass scheme trustees to raid their DB pension funds to recover their additional costs. Actuaries working for the TOCs have estimated that the combined additional costs for the train operators amounts to about £46 million a year.

National negotiations

A body called the Informal Pensions Working Group involving the TOCs and the four rail unions have been discussing how agreement could be reached at a national level to prevent employers recouping all of their additional NI costs by exercising their statutory override, but also acknowledging the additional costs that the employers will incur. TSSA and other trade unions have been attempting to minimise the impact on members' occupational pensions, which is why the issue has taken so long to get to this stage.

Framework Agreement

A Framework Agreement was reached in December 2015 applicable across all the TOCs - although each TOC then has to apply it to their particular section(s) of the RPS (see below for details). Prior to reaching that ‘national’ agreement each union had considered its position and all of the unions insisted that this also had to be a collective decision between the unions. If any had refused to accept, none of the unions would have done so.

TSSA’s acceptance followed a meeting of the union’s TOC company council and pension reps on 20 October 2015. The overwhelming consensus of that meeting was that the changes should be accepted for pragmatic reasons. Amongst these was the prevention of the use of the statutory override and recognition that many people cannot afford to retire at 60 (the TOCs asserted that the average age of new entrants is 35 and so most people were paying to exercise an early retirement option they were not going to use).

What is the Framework Agreement?

The proposed changes to the scheme are:

1) Cost Neutral Early Retirement Factors (CNERF) moved to 62 (currently set at 60) for future accrual from April 2016 for all non-protected members This means that for non-protected members (ie, not for members with protected status or an indefeasible right) their Normal Retirement Age moves to 62.

Benefits earned prior to 1 April 2016 will not be affected (meaning that they can still be taken at 60 without the application of early retirement factors).

2) For pay reviews on or after 1 April 2016 a pensionable pay cap of RPI plus 0.25% will be applied for each year for all members (ie, including protected members and those with an indefeasible right). Pensions will continue to be accrued based on uncapped pensionable pay, but future increases to such pensions will be subject to the annual cap (the annual cap applies in the period 1 April to 31 March). This change will mean that a non-pensionable element of salary will not be introduced.

The past service credit release (PSCR) that will result from the RPI+0.25% cap will be released gradually over a period of time and will be used to reduce the contributions evenly over 12 years or more and will be monitored by the RPS Scheme Trustees. With the Shared Cost arrangements in place in the RPS, this means that both employer and member contributions may reduce (see the specific company proposal below), subject to any future deficits shown up by the three yearly section valuations.

The TOCs have also agreed that the individual employers will not use their legal right to a statutory override.

Comment

Members should be aware that this issue was introduced by a government that professes to want to promote saving for retirement and yet has given employers a legal right to unilaterally raid pension schemes to recover costs without regard to the impact on pensions. What the government has achieved according to some authorities[i] is gain an extra £5 billion in revenue!

The agreement achieved by the trade unions is a significant improvement on the TOCs original proposal that included options to:

· Introduce CNERF from age 65,

· Abolish lump sum payments

· change the accrual rate of your pension.

The trade unions have also been able to ensure that there will be no element of non-pensionable salary introduced by the proposals (something that exists in other firms) and obtain a last minute concession to remove members with an indefeasible right from the change of retirement age.

[1] Pensions Policy Institute research funded by the Nuffield Foundation, published in February 2014 at: www.nuffieldfoundation.org/sites/default/files/files/Single%20Tier%20paper%204.pdf

 

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