Rail sector pension fund warns of £15bn finance hole under new rules


The largest pension scheme serving the UK rail sector has warned that a major regulatory shake-up of funding rules would blow a £15bn hole in its finances, with a “substantial” cash impact on dozens of employers.

The £30bn Railways Pension Scheme, with 350,000 members — including rail managers and train drivers, set out its concerns to the Pensions Regulator in a recent response to the latter’s plans for the biggest shake-up of its funding code governing defined benefit schemes in two decades.

Under current rules, DB schemes, which promise a secure pension for life, have flexibility over the financial assumptions used to value pension promises.

But under the proposed overhaul unveiled by the regulator in March, deficits at many of the UK’s 5,500 DB schemes are likely to increase as they use less rosy assumptions for future investment returns, inflating the cost of liabilities.

The regulator argues the overhaul would better protect pension rights already accrued and reduce the risk of employers and schemes “misusing” the current rules to manage their contributions.

But actuarial modelling prepared for the RPS, which provides DB pensions for more than 150 companies operating within the UK railway industry, suggested the overhaul could lead to a £15bn deficit in the currently fully-funded scheme as it switches to lower-risk but lower-returning assets.

Any subsequent funding shortfall would have to be picked up by rail employers, including Abellio and First Group, all of which are already under financial pressure from the collapse in passenger numbers. However, the railways are currently effectively nationalised after the government stepped in as passenger numbers collapsed during the pandemic.

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The new rules are due to come into effect late next year.

“The issue we wish to highlight is the ability for employers to cope with a substantial change to the DB funding regime via a significant level of medium-term de-risking,” said John Chilman, chief executive of Railway Pension Investments Limited, which manages the RPS.

The Rail Delivery Group, which represents private sector rail operators, did not respond to a request for comment.

The Department for Transport said: “Train operating company sections of the Railways Pension Scheme should be fair, affordable, and sustainable for employees, employers, the taxpayer and farepayers, and are working closely with the industry to ensure this.”

The RPS is among a number of multibillion pound DB schemes which have warned that the funding overhaul could present difficulties for many businesses across the UK at a time when cash flows are constrained as a consequence of Covid-19. 

Earlier this year, Lane Clark & Peacock, the actuarial consultants, said the proposals could force hundreds of companies to inject an extra £5bn a year into their pension schemes, diverting cash from dividends and investment.

“The regulator’s proposals risk moving back to one-size-fits-all regulation,” said Matthew Percival, director of people and skills policy at the CBI business group.

“Businesses and trustees need to be confident that the new code will allow them to make decisions that benefit savers and the long-term health of companies.”

The £74bn Universities Superannuation Scheme, the UK’s largest private sector DB plan, has also raised concerns about the impact of the proposed changes on schemes that are open to new joiners, including its plan, and the railways scheme. These invest in riskier assets to generate returns to pay for new pensions.

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Under the new code, these schemes may be pressured to close if contributions become unaffordable for sponsoring employers.

In its consultation document, the regulator said the proposals could have a “significant impact for some schemes, particularly those that have been running excessive and unjustifiable levels of risk.”

The regulator said it had received more than 100 responses to its DB funding code consultation and would “read those carefully before reaching any conclusions“.

It added it was “too early to tell” what overall impact the proposed approach to the code would have on employer contributions and scheme deficits as it was still considering responses.

Additional reporting by Philip Georgiadis



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