Getting Britain moving: A pensions perspective

What we know so far of the Labour party's plans are set out in its rail policy document 'Getting Britain Moving' published on 25 April 2024 (the "Rail Policy") and its general election manifesto published on 13 June 2024 (the "Manifesto"). In these documents, the Labour party has confirmed its intention to bring passenger services into public ownership within England and establish a new arm's length body - Great British Railways ("GBR") - to be a "directing mind" in charge of both infrastructure and operational services.

Ahead of our Top Table Lunch, we are releasing four briefing notes discussing key issues that remain to be explored and what it means for the rail industry. In our first note (which you can find here) we looked at the funding of GBR, whether it could achieve the cost savings touted by the Labour party and what nationalisation could mean for the private sector. Our second note (which you can find here) examined the implications of GBR and nationalisation for passenger and freight operators to explore what opportunities it may offer and where the tensions may lie between them. Our third note (which you can find here) considered the interplay between nationalisation under GBR and how that might work with the Labour party's plans to devolve more powers to devolved authorities.

In this note we look at Labour's rail plans from a pensions perspective. Pensions have historically proven to be one of the most contentious issues affecting the privatised rail industry, so it is surprising that the word 'pensions' is not used at all in the Rail Policy, which provides limited hints as to how the pensions aspects of Labour's rail plans will be dealt with. Notwithstanding this lack of detail, this final briefing note considers what Labour have said and what it might mean for operators, GBR and others in the industry.

1. What Labour says

As we said in our second briefing note, the Rail Policy and the Manifesto set out the Labour Party's plan to achieve renationalisation by taking over services currently performed under National Rail Contracts ("NRCs") once they reach their contractual expiry or earlier, if the current operator fails to meet its NRC obligations. Although the Rail Policy also makes clear that as part of a reset of industrial relations with the rail unions, GBR is intended to be a "new, single employer" for all rail employees, in practice the first tranche of NRCs are due to expire before legislation can realistically be passed to establish GBR and so will likely have to pass to the operator of last resort ("OLR").

At present, when the OLR takes over passenger services it creates, or repurposes, a wholly owned special purpose vehicle to act as the operator and enter into a service contract with the Secretary of State for Transport. We presume therefore, that for the first tranche of NRCs there will be a two-stage transfer process under which current passenger operator employees transfer to their respective OLR entity and then onto GBR once it has been established. Later NRC tranches would transfer directly to GBR.

Before we look at the pensions implications which may result from these plans, we will briefly consider the existing arrangements.

2. The existing arrangements

The history of pensions and the railways is a complex one. Put very simply, before privatisation in the mid-1990s, employees of British Rail were members of the British Rail Pension Scheme ("BRPS"). Following privatisation, a new, joint industry scheme was created, the "Railways Pension Scheme" ("RPS"), which succeeded the BRPS.

The RPS is made up of three parts; the "Shared Costs Arrangement" ("SCA"), the "industry-wide defined contribution section", and the "1994 Section". Eventually, pensioner and deferred members of the BRPS were transferred to the 1994 Section, whereas the active members (i.e. those still in employment) of the BRPS were transferred to the SCA. We will only discuss the SCA.

The Shared Costs Arrangement

The SCA is, as the name suggests, a shared costs scheme, in which the costs are shared between the employer and employees, on a 60:40 split (at least in theory). The SCA was created, primarily, to cater for those members of the BRPS who continued in service after privatisation and to preserve certain statutory protections these employees were granted as part of the transition to a privatised rail industry.

This protection takes two principal forms: i), the creation of "protected persons" status, and ii), the conferral of the "indefeasible right".

Very simply, this means that for so long as a protected person remains in the rail industry, they will have a right to remain in the RPS and accrue pension benefits at least as generous as those in the BRPS. The consequence of this protection is that each new private employer must become part of the RPS, and the SCA in particular. This has resulted in the creation of a large number of 'sections' within the SCA. As of 2022, there were 104 such sections, made up of passenger service providers and non-passenger service providers, each with their own rules and "designated employer".

Pension liabilities

Whilst each private passenger operator is largely liable in the same way as any employer involved in a defined benefit pension scheme, passenger operators benefit from certain protections in relation to future contributions, once their involvement in the rail industry comes to an end, that is, as long as they are up-to-date with ordinary scheme contributions for their period as sponsoring employer. This protection is typically found in passenger operators' relevant NRC.

Transfer to Subsequent Operators

Under the NRCs, the existing passenger operators agreed to become the "designated employer" of relevant SCA section for the purposes of the Railways Pensions Scheme Order 1994. In other words, they stepped into the shoes of the outgoing passenger operator (where relevant), and assumed the section's liabilities, including any deficit (subject to any outstanding contributions due from their predecessor). It was presumed that the same model would apply under the Conservative party policy of transitioning from NRCs to Passenger Service Contracts but whether or not this will apply on renationalisation is an open question. However, on any basis the OLR/GBR will take on a huge responsibility for many thousands of rail workers' pensions.

3. What Labour's plan might mean

At this stage, it would appear to us that, save for the possibility of very significant changes to the current legislation governing rail pensions, GBR could, broadly, do as the OLR does now, but perhaps merge the various sections into a single section, or create an entirely new section. However, unlike the OLR, GBR might not simply step into the shoes of the outgoing passenger operator or OLR entity as the new designated employer. This would be largely unknown territory, and could give rise to a number of unforeseen and serious consequences for employers, employees and the Trustees, as the transition from several operators to a single operator progresses, including unanticipated costs and liabilities for outgoing employers. For the OLR/GBR, depending on how that transition progresses, it may be that it will face the possibility of taking on responsibility for, not only future pension liabilities, but existing, potentially significant, deficits in the current sections. Beyond the immediate financial implications for the OLR/GBR, if it does transition to a single employer-single section arrangement, there is also the issues of managing any differences between hitherto separate sections rules and benefits.

For the RPS Trustees, and the administrators, there are also the practical and cultural implications of managing a change to the structure of the SCA, from administering members' benefits to dealing with one, dominant, employer in a scheme which has hitherto had several large employers, along with several small ones.

Nevertheless, beyond the implications for the Trustees, members and current participating employers, on any basis GBR and, ultimately, the government will be taking on a huge responsibility for pension funding for all those currently employed in those parts of the rail industry which are slated for renationalisation. Labour has previously stated that its rail plans are cost neutral, but in relation to pensions at least, they are perhaps, less cost neutral than they say they are.

4. Conclusion

At present, it is not clear what the extent of the pensions implications of Labour's renationalisation plans will be. However, they do have the potential to be very disruptive, to employees, employers and the RPS itself. It is therefore, of particular importance to employers, that the pensions implications are given very careful consideration and are factored into any wider transition planning.

Stephenson Harwood's pension advisory and employment teams are ideally placed, alongside members of our rail team to advise and guide employers, and others, affected by rail renationalisation.