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London Midland: Changes to pensions

3 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 participate in an online referendum ballot about your employerÂ’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 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

 

1. The age at which benefits may be taken without reduction for early payment to move from 60 to 62

· To apply to benefits accrued from 1 April 2016.

· Cost neutral early retirement factors to apply to pension taken before age 62.

This means that if benefits are taken at 60 those benefits earned before the date of implementation will not be reduced and only those earned after the date of implementation will be reduced on a cost neutral basis on account of being paid 2 years’ early. For people near to retirement or for those who retire at or after age 62 this change will have little or no effect on benefits.

· Applies to all new non-protected members and current non-protected members of the scheme.

· Does not apply to protected members (19% of existing membership) or those with indefeasible rights (4%)

· Does not apply to new indefeasible employees who will be offered the one off option of joining on Schedule 8 or CNERF 62 Factors.

· Change will not apply to members with protected rights. However they may choose to benefit from lower contribution rates, in which case they will have a one off option and need to sign a waiver for this specific part of Protection only.

· Change will not apply to indefeasible rights members. However they may choose to benefit from lower contribution rates and will have a one off option by formally consenting to this particular change.

Additional Proposal

· Given the short time aspect since the members have made irrevocable decisions, LM propose to provide an option to those protected and indefeasible members who waived their rights in relation to this aspect only and elected to move to Cost Neutral 60 (CNERF 60) from 01 July 2015 the one off option of reverting to Category 60 (Schedule 8) factors, retaining Cost Neutral 60 (CNERF 60) Factors or moving to Category 62 (CNERF 62). This amounts to 54 members (47 protected and 7 indefeasible members) only 20% of which are over the age of 62. This was fully supported by all the Trade Unions at the London Midland Joint Company Council Meeting.

2. Pensionable pay increases capped to RPI plus 0.25% for past service

· All increases in pensionable pay in a year to be restricted to RPI plus 0.25% (includes all pay awards, development, merit and promotions). This reduces the past service liability which, providing the assumptions remain the same, in turn reduces the joint contribution rate payable.

· All existing elements of pensionable pay to continue to be pensionable but any increases over the year in excess of the cap will only accrue benefits for future membership from the effective date of the increase. These excess increases to be treated as new Pensionable Restructuring Premium (PRP).

This change to apply to all members including new entrants, protected and indefeasible rights members.

· If someone receives one or more pay awards, pay rise and or promotion in the same year these will be subject to the pensionable pay cap. Consideration is still being given as to whether more than one award per annum will be combined in one additional pensionable restructuring premium per annum or as they occur.

· The September RPI will be used as the reference RPI for pensionable pay capping purposes; this is in line with that used by the Scheme Actuary.

· The reference year for the pensionable pay cap will be 1 April to 31 March each year.

Based on actuarial calculations by Towers Watson dated 22 December 2015 the estimated impact on the London Midland Section contribution rates for protected and non-protected members with effect from 08 April pay date is shown below:

(These estimated figures need to be validated by the Scheme Actuary)

CONTRIBUTION RATES

Estimated Contribution Rates from

07 March 2016

Member

(40%)

Employer

(60%)

Overall impact (100%)

 

Protected

Schedule 8

Protected CNERF 60

Non-Protected & elected CNERF 62

Protected

Schedule 8

Protected CNERF 60

Non-Protected & elected CNERF 62

Protected

Schedule 8

Protected CNERF 60

Non-Protected & elected CNERF 62

Current FSJCR contribution rate

10.12%

9.56%

9.56%

15.18%

14.34%

14.34%

25.3%

23.9%

23.9%

Current shortfall contribution rate

0.77%

0.77%

0.77%

1.16%

1.16%

1.16%

1.93%

1.93%

1.93%

Total current contribution rate

10.89%

10.33%

10.33%

16.34%

15.5%

15.5%

27.23%

25.83%

25.83%

Reduction due to proposed changes

-2.16%

-2.4%

-2.56%

-3.24%

-3.6%

3.84%

-5.4%

-6.0%

-6.4%

Revised total contribution rate

8.73%

7.93%

7.77%

13.1%

11.9%

11.66%

21.83%

19.83%

19.43%

Online Referendum Survey

Whilst the trade unions have accepted the Framework Agreement and have achieved a number of improvements to the original proposals from the combined TOCs, we want to know your views about your company’s proposal.

With this in mind, TSSA is running an online Referendum Ballot via Survey Monkey which you can access by following this link:

https://www.surveymonkey.co.uk/r/FLFSBHC

TSSA is recommending that you accept the company proposal by voting in favour of it.

We would ask that you make time to participate in the Survey and ensure that you have responded by no later than Thursday 11th February 2016.

I would also add that if you know someone who would like to participate but hasn’t received this message, please ask them to let me have their email address by contacting me at: walshv@tssa.org.uk

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