You are:

News

Return to news listings

Changes to pensions South West Trains

9 February 2016

Over the last year the trade unions have had a series of meetings with the TOCs in connection with the ending of contracting out of the Second State Pension (S2P) which has arisen from pension reforms introduced by the government.

 

This circular aims to brief you on those changes and to ask you to respond to TSSA about your employer’s proposals that will see changes to your benefits under the Railway Pensions Scheme.

Pensions Act – Single Tier Pension

Under the Pensions Act 2014, the government committed to introduce a Single Tier Pension (STP) that would be payable to people who reach state retirement age from 6th April 2016 and would replace both the basic State Pension (BSP) and Second State Pensions (S2P). The STP has recently been confirmed as amounting to £155.40 a week and will be paid at this level to people who have managed to make at least 35 years’ worth of National Insurance Contributions (NICs).

Pensions Act – end of contracting out

Through the Act, the government has also decided to end contracting out of the S2P by final salary defined benefit (DB) pension schemes.

The Railway Pension Scheme is a defined benefit pension scheme that is currently contracted out which means that members are entitled to the existing Basic State Pension 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 Basic State Pension. 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 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.

Pensions Act – statutory override

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.

Informal Pensions Working Group

Under the auspices of the Informal Pensions Working Group involving the TOCs and the four rail unions, both sides have been seeking to find a resolution to the issue that prevents the statutory override being exercised but acknowledges the additional costs that the employers' will incur. On this latter element, the 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

I am now able to advise you that a framework or principles agreement was reached in December and which is applicable across 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 us would have done so.

For TSSA, our acceptance followed a meeting of TOC company council and pension reps that took place on 20th October 2015 and at which we were able to explain changes and answer questions. The overwhelming consensus of the event was that members accepted the changes 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 (principles) 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 1st April to 31st March). Thus, any increases above this cap will apply for future service only from the effective date. A Pensionable Restructuring Premium (PRP) will be created for that element of the pay increase above the cap. All increases in pay above the cap will get a PRP including, for example, promotional increases, and development moves (eg, year 1 to year 2 apprentices). 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 the 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 and even 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.

Company Proposal

The proposal from South West Trains is to adopt the framework proposed by the Industry Pensions Working Group (IPWG) to apply from the 1st April 2016.

Cost Neutral Retirement Factors to 62 years:

· Cost neutral early retirement factors apply to pension taken before the age of 62 years, but do not change already accrued benefits.

· Applies to all non-protected and new members of the scheme, but not to indefeasible rights and protected members of the scheme.

· Applies to benefits accrued from 1 April 2016.

Pensionable Pay Cap RPI + 0.25%:

· All increases in pensionable pay in a year to be restricted to RPI plus 0.25%

· All existing elements of pensionable pay to be pensionable, increases over the cap accrue benefits for future membership only as a new PRP.

· Applies to all members.

· Combined awards in a year are all subject to the pensionable pay cap, limited to one new PRP per annum.

· Pensionable pay cap reference year 1 April to 31 March.

Estimate Contribution rates:

Level of Contribution Employee Employer

Current 11.12% 16.68%

Non Protected with changes 8.51% 12.77%

Protected with changes 9.55% 14.33%



[i] 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

Return to news listings

Join TSSA

 

 

Directory