Rail pensions row.
With Stagecoach, Virgin and Arriva bids dismissed after being ruled non-compliant, CHRISTIAN WOLMAR believes that another nail has been hammered into franchising’s coffin
WITH the franchising system already reeling under a series of setbacks, somehow the Department for Transport and a couple of train operators - Stagecoach and Arriva - have apparently dealt it a fatal blow over the complex and obscure issue of pension payments.
Determining who exactly is to blame for this debacle is not easy, and both parties are (as is usual in this type of dispute) blaming each other. Oh, and the Treasury, of course, is copping it from everyone. Amazingly, it is quite possible that Transport Secretary Chris Grayling is not actually to blame for this debacle.
Getting to the bottom of this saga is no easy matter, given that everyone wants to be exonerated from having created a mess from a row that has been festering behind the scenes for more than a year. Even the origins of how it all started are unclear.
The issue is over the arcane but important topic of the value of the Railway Pensions Scheme, and whether it is in surplus or deficit. The basis of the scheme is that the train operators pay 60% and the employees 40% of the required contributions, although there is some variation in staff contributions which range from 9% to 11%.
This system has operated under the radar for the near quarter of a century since that first privatised train trundled out of Twickenham station in 1996. Until around a year ago, when - and this is where accounts differ - either the Treasury or the DfT, alerted by a freight company seeking a buyer, realised that there was a problem over the valuation of the pension pot.
Ever since privatisation, it had been assumed that the government essentially stood behind the pensions scheme. In other words, if there were a deficit and the pot was insufficient to pay out, then it would fall on the government to make up the difference. Crucially, that meant the scheme was low-risk, and therefore less money was required to sit in the pot than if there were no government guarantee.
Then some bright spark, presumably in the Treasury, said something to the effect of: “Hold on a sec, we should not be bearing this risk - it is up to the private sector. We should not be underpinning this pension scheme.” And all hell was let loose.
This is where it gets even murkier. The undertaking that the government underwrote the scheme was actually (according to my sources) only “tacit, rather than explicit”. That is a reasonable assumption to make. After all, we know that if a franchisee is unable to keep running trains, then the government has an operator of last resort ready to step in.
Similarly, it was assumed that this was the case with the pension fund. But no, apparently not. And once the regulator had been informed, there was then concern among operators that there would have to be an increase in payments to keep the now more risky pension fund solvent.
I am no pension expert (indeed there are not many in the rail industry), but it is pretty clear that the whole business is based on predictions and assumptions about the future - in other words, actuarial calculations are really guesswork rather than based on precise numbers.
It is certainly art rather than science, and that is part of the problem in this dispute as no one
is quite sure of what payments the new system may involve. Indeed, one source told me that the Pensions Regulator has not yet decided which of four categories - from high to low risk - the fund will now be put in, and each one clearly requires a different level of payment.
A lengthy period of negotiation ensued between operators and the Department about what precisely this meant, and what extra liabilities might this involve in any new contracts.
The Department is adamant that, to coin a phrase, ‘nothing has changed’ and that operators were always expected to take on the pension liabilities. Stagecoach, on the other hand, felt that everything had changed. It argued that the total liability - across all franchises - could amount to as much as £5 billion to £6bn over the life of a new set of franchises. The operator also argued that under the new system, employees would be expecting to contribute more and there was a risk of industrial unrest.
Given that these changes could easily turn a profitable franchise into a loss-making one, there was some tough negotiation between the operators and the Department.
There was a partial concession from the Department, which agreed to take on the share price risk - in other words, if the FTSE fell significantly, pushing up the Fund’s needs, then the government would step in.
The Rail Delivery Group did indeed step in, and tried to negotiate a compromise. In a letter to Rail Minister Andrew Jones, RDG Chief Executive Paul Plummer wrote in early April: “A crucial element to enabling gradual changes is the provision of a risk-sharing mechanism with Government. We consider that the risksharing that we propose does not in practice import any greater risks for Government than already exists under the current franchising arrangements, but it does provide tPR [the Pensions Regulator], Trustees and employers with documented support against unexpected outlier events.”
Clearly the Department did not agree and refused to change the arrangements, with the result that Stagecoach’s bids, including its joint effort with Virgin for West Coast, and Arriva’s bid for East Midlands were all non-compliant.
Although operators complained that this decision was made at a late stage by the Department (an argument supported in Parliament by former Transport Secretary Patrick McLoughlin), government sources suggest that the operators had been warned all along that their bids were non-compliant and that the government - or rather the Treasury - was not prepared to take on any additional risk. They also point out that other bidders were able to put in compliant bids, although effectively Abellio was left as the only one standing for East Midlands.
Amid all the uncertainty arising from the Williams Review and the lack of other bidders, it is amazing that the East Midlands franchise was let. But ‘rules is rules’, and the law says that effectively the state can only intervene as a matter of last resort. So it was, supposedly, an unstoppable process. Rather like Brexit… except Brexit may be stopped!
Where this leaves franchising is anyone’s guess. If Stagecoach has thrown its toys out of the pram permanently, then the only wholly UK-owned bidder left playing is FirstGroup, and it is in a poor financial state with rumours that it may be broken up, leaving the company in no position to put in any brave bids. Without UK bidders, I think the whole process would be deemed unsustainable.
With Labour already promising to end franchising, now even the most free-market Conservatives might baulk at the idea that our railways are going to be run permanently by ‘Johnny Foreigner’. Wasn’t Brexit supposed to give us back control?