TfL sets out ‘significantly less generous’ pension reform options

The government has tasked TfL with making £100mn in cost savings in relation to its future service pension benefits — a target that the company said would “result in unacceptable detriments to members’ benefits”, in a pensions options paper dated October 14.

“Aiming to achieve the government’s £100mn cost savings target creates a disproportionate focus on affordability (cost savings) at the expense of fairness (member impacts),” TfL said.

TfL pensions are at the centre of a dispute between the government, TfL and transport unions. A government bailout of TfL in 2021 mandated a review of its pension arrangements.

Risks related to past service liabilities pose the principal threat to the financial sustainability of the scheme in the future

Transport for London

The Barber review, which modelled four options for alternative scheme designs, produced savings of between £79.3mn and £182.4mn for alternative final salary options, and up to £154.4mn a year for career average revalued earnings schemes.

This prompted unions to threaten industrial action over what they claimed were benefit cuts, and the Rail, Maritime and Transport Union’s London Underground workers went on strike in March, June and August.

The new deal mandates TfL to set out a plan for pension reform options by September 30 and an implementation plan by January 31 2023. 

‘Not proposals for reform’

TfL has set out the adoption of either a final salary design, or a Care design, for future service reform.

Each concept has two sub-options. Both are formatted either to have a normal retirement age of 65, without tiered contributions, or to have a retirement age set at the state pension age, with tiered contributions. All four options would be indexed against the consumer price index, capped at 5 per cent.

The first final salary concept, which would have a retirement age of 65 and be without tiered contributions, is the sole option that could see costs increase, according to TfL. Costs could rise by £28mn, while the scheme could also save up to £86mn. The remaining options are predicted to yield cost savings.

TfL said that all four options would reduce benefits by a third and that this impact would need to be mitigated, which would eat into cost savings.

It added that the options are “significantly less generous than public sector schemes at lower accrual rates” required to meet the government’s target cost savings, and would require primary legislation.

TfL emphasised that these options “are not proposals for reform”.

The cost savings target is ‘out of date’

TfL cast doubt over the suitability of the £100mn cost savings target, suggesting that it had not been properly defined and is now out of date. It said the scheme is now in surplus and not in receipt of deficit recovery contributions from its sponsor. TfL’s annual payments have fallen by around £70mn, it added.

Potential savings raised by the TfL independent panel review also failed to consider the planned alignment of the retail price index with CPI including owner occupiers' housing costs from the early 2030s.

“Had this been known, the value of potential savings cited by the TfL independent panel review would have inevitably been lower (by up to an estimated £55mn), reflecting the reduced scope for potential savings in the way indexation applies to the scheme (a move from the retail price index to CPI, as has been the case in the delivery of public sector pension reforms),” it said.

TfL also demanded government support for the management of its past service liabilities.

“Risks related to past service liabilities pose the principal threat to the financial sustainability of the scheme in the future,” it said.

“Significant past service deficits could arise, resulting in unaffordable levels of contributions for TfL. There is a one in 20 risk of a £4bn deficit by 2024 and a one in four risk of a £2bn deficit by 2024,” it continued. 

TfL said that these risks were exacerbated by the “anomalous private sector status” of the scheme.

“Reform of future service would lead to similar risk issues — a closure of the scheme to future accrual could crystallise a deficit of around £6bn,” it added.

“The level of contributions required from TfL in this circumstance would preclude any potential future service reform, unless past service liabilities are addressed at the same time.”

TfL said there were two “main options” for government support of past service liabilities. It could either legislate to help transfer past service assets and liabilities to a new, or existing, funded or unfunded public sector arrangement, in order to reclassify the scheme as a public sector scheme.

Alternatively, the government could provide a Crown guarantee.

“Legislation to transfer past service assets and liabilities to an unfunded arrangement may have the most benefit,” it said.

“This option would enable the risk to TfL of past service deficits arising to be removed entirely and would provide the government with the benefit of £12bn of assets that would no longer need to be matched to liabilities.”

RMT general secretary Mick Lynch said: “TfL’s latest pensions paper clearly shows the depths to which this government is prepared to stoop, demanding that our members take 30 per cent cuts in their pensions in retirement in pursuit of a cut that TfL knows is completely unnecessary. 

“It’s shameful that TfL continues to participate in this morally bankrupt process. Our members’ pensions have become bargaining chips in a one-sided negotiation with a spite-filled government, and with no one else prepared to stand up and fight for working people, RMT members have to do it themselves. 

“This union will never accept such attacks on our membership and will continue its industrial campaign until we get a just deal.”