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Virgin Trains West Coast: Pension Scheme Changes

25 May 2016

Last year the rail Unions 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. Whilst most TOCs concluded discussions late last year, Virgin Trains West Coast initially told the Unions they would not be making significant changes to their scheme. They have now advised us they will be implementing the proposals agreed between the TOCs and Unions as detailed below, in addition to introducing a SMART Pensions facility on a voluntary “opt-in” basis, with effect from 4 July 2016.

Background

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 Pension (S2P). 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 came 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.

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.

VTWC Proposals

Under the auspices of the Informal Pensions Working Group (IPWG) involving the TOCs and the four rail Unions, both sides agreed to changes in order to prevent the statutory override from being exercised, but which acknowledges the additional costs that the employers' will incur. The proposed changes to the Virgin Trains West Coast scheme are in line with these principles and are as follows:

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 4 July 2016
  • Cost neutral early retirement factors to apply to pension benefits 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 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 entrants and non-protected members of the scheme
  • Does not apply to protected members (15% of existing membership) or those with indefeasible rights (8% of existing membership). However, protected members and those with indefeasible rights may choose to benefit from lower contribution rates, in which case they will need to sign a waiver for this specific part of Protection only

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

  • All increases in pensionable pay in a year to be capped to RPI plus 0.25% (includes all pay awards, 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)
  • If someone receives one or more pay awards, pay rise and or promotion in the same year the combined awards will be subject to the pensionable pay cap
  • 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 4th July to 3rd July each year
  • This change applies to all members including new entrants, protected and indefeasible rights members

3. SMART Pensions

In addition to this (and not part of the IPWG framework), VTWC are also introducing a SMART Pension option. This is a salary sacrifice arrangement, where your salary is reduced by the same amount as your pension contribution before NI deductions are made. The employer then pays this amount in to the pension scheme on your behalf. The result is that your take home pay increases slightly, while your total pension contribution remains the same. Similar arrangements exist for childcare vouchers and cycle to work schemes. In response to the Unions’ concerns, the Company has agreed for this to be introduced on a voluntary “opt-in” basis.

Comment

It’s really disappointing that VTWC’s original position last year was that it would not be necessary to implement significant changes to the pension scheme, and then they suddenly announced this year they would be implementing the IPWG proposals after all. No adequate explanation has been given for this change of approach, and the fact the Company have delayed the changes has resulted in staff paying both higher NI and pension contributions for a number of months than would have been necessary had they followed the example of the other TOCs and dealt with the issue last year. However, the proposals do fall within the IPWG framework and as such have been agreed by the Unions. There will now be a consultation period until 1 July 2016 with individual scheme members before the changes can be introduced.

If you require any further information on the contents of this article, please contact your staff reps in the first instance. Please also discuss the contents with your colleagues, and encourage any non-members to join. The more members we have, the stronger we are. Membership application forms can be obtained from your TSSA reps or you can join on-line here.

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