The UK’s railway union called for the resignation of transport secretary Chris Grayling on Thursday, threatening strike action over the escalating railway procurement row.
Nationwide strike action is on the table, the National Union of Rail, Maritime and Transport Workers made clear, if the dispute provokes changes to the defined benefit Railways Pension Scheme.
The row hinges on who picks up the bill for contributions to the RPS that go above and beyond the “cost sharing” agreement, in place since privatisation in 1994, which sees employers contribute 60 per cent and members 40 per cent.
According to excluded franchise bidder Stagecoach, RPS trustees assumed the government stood behind any funding shortfall, but an investigation by the Pensions Regulator last year questioned whether this was guaranteed.
The regulator reportedly found that a £7.5bn deficit existed across the franchise sections, requiring large cash injections and exposing train operating companies to significant new risks, although this figure is highly contested.
The government needs to come clean about its role and responsibilities in this area. It has covered pensions when franchises have failed in the past
Andy McDonald MP
Considering what it sees as heightened risks, Stagecoach asked the government for further contractual protection in its recent bids for three rail franchises, but was flatly refused and disqualified from the tendering process last month.
Stagecoach and its partners are now taking the government to court.
For its part, the government maintains that nothing has changed in its approach to pensions risk. Transport minister Andrew Jones has even said there is a new risk-sharing mechanism in the new franchise.
The RMT, however, does not agree. The union accused Mr Grayling of trying to abolish the RPS by stealth. General secretary Mick Cash said: “The DfT under Grayling has an agenda to deepen privatisation away from the franchise system to full-blooded private ownership but wants to shed its own potential pension liabilities or that of any new owners.”
He said the DfT was seeking to “dilute their commitment” to the railway franchise system, reducing its pension responsibilities and signalling it were no longer prepared to nationalise failing companies, such as the East Coast franchise in May last year.
“Any attack on the RPS or its benefits and contributions structure will be met with coordinated strike action... right across the passenger rail sector,” Mr Cash said. The DfT was not immediately available to respond.
What is going on at the RPS?
The RMT alleges that government backing is being withdrawn form the railways scheme, while the Department for Transport insists nothing has changed. Who is right?
According to disqualified bidder Stagecoach, the Pensions Regulator has concluded that the government does not provide the support for the scheme that it was previously assumed to by trustees – opening up a larger shortfall and requiring fresh contributions from either employers or employees under the shared cost arrangement. The DfT has refused to cover these risks.
Stagecoach analysis suggests the government does provide some protection, but this is limited to:
The 2019 scheme valuation only – leaving the operator on the hook for contribution increases arising from the 2022 and subsequent valuations.
Deficit contributions only – the franchisee takes the full risk of contribution increases relating to ongoing employee service costs.
Employer contributions only – so the operator takes the risk that employees are unwilling to accept increased employee contributions leading to either industrial action or a need for the operator to fund the increases.
Funding row bolsters renationalisation supporters
Andy McDonald, Labour’s shadow transport secretary, said the health of railway franchising was being called into question. “Rail franchising is now failing on its own terms with a dwindling number of bidders and uncertainties around pensions threatening to further undermine the viability of the system, perhaps fatally.”
He added: “The government needs to come clean about its role and responsibilities in this area. It has covered pensions when franchises have failed in the past.”
The government-commissioned UK railways review, chaired by Keith Williams and established in September last year, has not been tasked to look at pensions. Mr McDonald said: “I can only conclude that the secretary of state either doesn’t take this issue seriously or he isn’t on top of it. Either way, it’s bad.”
A DfT spokesperson responded: “We have total confidence in our franchise competition process, and will robustly defend decisions that were taken fairly following a thorough and impartial evaluation process.”
But according to a formal legal disclosure published by the DfT on April 15, “All bids contained some non-compliances” for the East Coast franchise competition, including Abellio, which was awarded the contract last month. This has fuelled fears that the DfT’s procurement process is broken.
RMT demanded Mr Grayling’s resignation letter. “Grayling needs to go now and as he is reckless and incompetent,” Mr Cash said.
He added that renationalisation was becoming an attractive option. “The railway needs to be run in the interests of the people, the economy and the environment, and that can only be done through public ownership, [which] is widely supported by users and staff alike.”
Legal action begins against DfT
Last week, Stagecoach began the second part of its legal action against DfT after being excluded from three railway procurement competitions in April this year.
DfT excluded Stagecoach and its partners for submitting “non-compliant” bids, but Stagecoach said government changes around pension liabilities were asking them to shoulder “unquantifiable and unmanageable” pensions risk.
The industry-wide Railways Pension Scheme has a potential funding gap of £7.5bn, according to reports of a leaked letter from the Pensions Regulator. This figure is highly contested, with Stagecoach estimating the deficit at closer to £1bn, but maintained that even a £1bn deficit is an “impossible” level of risk for DfT to demand companies shoulder.
Stagecoach said there is something rotten in the government’s franchising process, awarding contracts to companies prepared to take on large pensions risk as opposed to those that will provide the best service.
Kirsty Bartlett, a pensions lawyer and partner at Squire Patton Boggs, said: “Whenever a public service is being procured, surely the best outcome for the public, for taxpayers and the government department is that you get the best possible provider for that service at the best possible price.”
She continued: “Pensions is an important part of that, but it's not the main service. It's absolutely critical that all sides understand what the costs and the risks are and then make the best decision about where those should lie.”
Stagecoach has now issued two claims at the High Court: last week, over exclusion from contesting the West Coast line; and on May 8, over exclusion from contesting the East Coast line, which it currently operates. German company Arriva began separate legal action against the UK government this month.
Stagecoach, and its partners, Virgin and the Société Nationale des Chemins de fer Français, allege that DfT breached its statutory duties during procurement.
Martin Griffiths, Stagecoach’s chief executive, said: “We hope court scrutiny will shine a light on the franchising process and help restore both public and investor confidence in the country’s rail system.”
A DfT spokesperson responded: “Stagecoach is an experienced bidder which knowingly submitted non-compliant bids on all competitions. In doing so, they disqualified themselves.”
