Nigel Harris says pensions problem has claimed Stagecoach and Virgin.

Festering pensions problem claims Stagecoach and Virgin

“At privatisation, rail pension funds were in surplus. Then ...Gordon Brown’s tax raid... sucked £250bn from our pensions.”

In my time on the Westmorland Gazette in the early 1980s, no one cared much about the dull proceedings of the local authority’s Policy & Resources Committee, which therefore resolved the level of domestic rates (now council tax) largely unobserved. Then the annual increase was announced. Boom!

Sometimes the most superficially boring things have the greatest impact on us. Pensions, for example. We fill the forms in and forget them - it’s so far away, isn’t it, retirement? Then there’s a problem and a scandal erupts.

Which is precisely what has happened on the railway, and this row is on the verge of driving two of our most experienced owning groups out of the rail industry. This would leave only First and Serco as wholly UK-based franchise owning groups. There couldn’t be a worst time for the DfT to lose Stagecoach and Virgin.

Except that it is the Department for Transport itself which has seemingly ‘pulled the rug’ from beneath both groups. For how we got here, may I suggest you turn to page 92 to read Insider’s superb context- setting historical summary. It’s essentially a tale of ‘events’, complacency and massively significant and damaging budgetary decisions by Government. Come back, when you’ve read Insider’s excellent column.

…and welcome back! The pensions deficit problem has been rumbling on for several years and there are three big questions: What’s changed to precipitate this crisis? Why is Abellio prepared to take on a risk which Stagecoach has baulked at? What does it mean for franchising? This is where ‘events’ have combined to thrust a growing behind-the-scenes problem right into the spotlight. We have seen, in recent years, pensions and public contract scandals involving Sir Philip Green and Carillion, where many billions of pounds went down the drain as a consequence of very poor governance. Government and Treasury are desperate to avoid a rail pension scandal - and with an esitimated deficit of £ 7bn and rising, the Pensions Regulator is becoming twitchy.

A great deal more money is required from employers and staff to ensure the pot is big enough to pay all the promised pensions, and it is this urgent need for extra cash which has brought this problem to a head.

The real problem is apparently government’s determination to push all risk onto the private sector and not be transparent about how, why or what the alternatives might be. It’s hideously complex, of course, but on the face of it, Stagecoach has a point that it would be unreasonable and indeed reckless to accept “full long-term funding risk on relevant sections of the Railway Pension Scheme” when it is only a short-term contracted train operator.

The Rail Delivery Group has proposed what appears to be a reasonable shared-risk scheme with Government, but this has run into the sand, despite up to £600m extra cash offered by the industry. In a leaked letter to Rail Minister Andrew Jones, RDG Chief Executive Paul Plummer paints a fairly apocalyptic picture of the future if agreement cannot be reached. The eye-watering contribution increases needed to fill the black hole could ‘break the scheme’.

Labour’s critical stance should be seen in the context of Chancellor Gordon Brown’s 1997 multi-billion pension fund tax raid, which analysts say has cost UK pension fund members a thumping £250bn. Government plundering of pension funds having caused the problem, critics say Government should fully guarantee pensions, rather than seek to force train operating companies to take this risk.

Continuing failure to solve this problem would likely lead to industrial action by unions seeking to protect their members’ pensions. I cannot believe that shareholders would allow their companies to take this risk and so finding bidders, already difficult, could become impossible. It could be that DfT has effectively killed its own franchise programme ahead of the Williams Review.

When I asked Abellio how it coped with assuming this risk in order to win the East Midlands franchise I was given the repeated answer: “Our bid was compliant.”

Interesting word, compliant. Stagecoach was only told of its failure to be compliant 24 hours before Abellio’s victory was announced. Are we seriously expected to believe that this failure to comply was only noticed so very late in the day? Stagecoach Group Chief Executive Martin Griffiths: “We are extremely concerned at both the DfT’s decision and its timing. The Department has had full knowledge of these bids for a lengthy period...”

This key question was also raised in the House of Commons by former Secretary of State for Transport Sir Patrick McLoughlin: “...it is odd that my Hon Friend is saying that somehow Stagecoach knew that it was noncompliant, because if the Department knew so early that it was non-compliant, one would have thought it would have been told quite some time ago. “Roughly translated: “This stinks.” When a former Transport Secretary and Conservative Party chairman is so implicitly critical of his own Government, then you really do need to demand clarity.

Labour Shadow Transport Secretary Andy McDonald asked if this is score-settling by officials who never forgave Sir Richard Branson for his 2012 legal action which collapsed the West Coast franchise award and made DfT look incompetent.

There are also some major political ironies here. When the Virgin-Stagecoach East Coast franchise collapsed in 2017, McDonald and Labour demanded Stagecoach should be banned from all franchise bids. Now the opposition is up in arms because the DfT has done exactly what Labour wanted. Politics, eh?!

McDonald neatly summarised the core allegation, however, when he said: “…that this Government, by sleight of hand, are trying to reduce their support for the railways pension scheme. They are trying to pass the costs onto the private sector. The rail industry has a plan to reduce the deficits... yet the Government ...are attempting to bulldoze through changes without consultation. That is reckless.”

I am told that the education pension deficit is being sorted - which means less money in schools. I also understand that little is being done to tackle the civil service pension deficit.

At privatisation, rail pension funds were in surplus and healthy. Then came Gordon Brown’s tax raid, which sucked £ 250bn from our pensions. This marked the start of a series of other subsequent problems which have led us to the current appalling mess.

Stagecoach and Virgin have been two very important train operators. To see them pushed out thus seems unreasonable, unwise and may yet have unpredictable outcomes.

This is one hell of a mess.