Work and Pensions Select Committee chair, Frank Field, has branded the current situation regarding rail franchising a “wretched mess, for pension scheme members and commuters alike”.

It comes as the Secretary of State for Transport, Chris Grayling, replied to a joint letter from the Work and Pensions Committee and Transport Committee, which put to him eight questions regarding rail franchising, and debates surrounding pension liabilities.

Field, however, unhappy with the response said there is “no clear plan for fixing it and a multi-billion pound obstacle on the track”.

The letter noted that the Rail Delivery Group has made clear to the Department for Transport (DfT) its “very significant concerns” about the current pensions settlement of the Railways Pension Scheme, and highlighted that the scheme’s deficit has increased from £4.8bn to £7.5bn over a three-year period.

The committees asked Grayling that given this, is it his position that bidders of new franchises should taker responsibility of the deficit, and will this remain the same if any future deficit might come to light.

In response, he said that Train Operating Companies, since 1994 when franchising arrangements were introduced, have and continue to be responsible for paying any employer contributions to their own section of the scheme during a franchise term, according to a schedule of contributions calculated by the scheme actuary following the triennial valuation. He said this includes any contributions required to “address the deficit”.

“The department anticipates that this will remain the case. The department has not placed any new or additional pensions demands on new franchises because the pensions term of the franchise agreement have remained largely unchanged. The changes made to franchise agreement terms in the latest competitions actually improve on the terms for franchise bidders by sharing risk on changes to deficit recovery contributions following the next actuarial valuation, thereby reducing the financial risk to franchises from the position they would otherwise have been in.”

The committees also asked Grayling how far back the issue with the deficit of the scheme goes back, whether all current contributors to the scheme – including existing TOCs – are liable to cover these increased costs and how the burden of covering the deficit is shared between the 170+ current contributors.

Grayling replied that a valuation of the scheme in 2004 showed that it had a deficit, and that concern about rising costs led to rail unions and employers establishing the Independent Railways Pension Commission.

“Its first report, published 2007, concluded that defined benefit pension provision across major parts of the railway industry was sustainable over the long term if it was made more affordable. Its final report, published in 2008, made recommendation for change,” he said.

In addition, he noted that The Pensions Regulator first wrote to the DfT in 2014, outlining concerns with the funding approach taken by the scheme’s trustee for the 2013 valuation of the train operating companies’ sections of the scheme. He also stated that the funding position of each section is assessed individually.

“If there is a deficit in one section of the RPS, and higher contributions are required as a result, it is for the employer and employees of that section only to increase contributions accordingly,” he said.

He was also asked the extent to which he is confident that understands the full extent of the problem, and what assessment the department has made of whether this additional liability will cause franchises to fall into financial difficulties and whether it increases the risk of default.

Grayling said: “All RPS sections are valued on a triennial basis, with the latest valuation having taken place in 2016 (effective date 31 December 2016). The funding position for each section is a matter for the RPS trustee and the designated employer for that section. As Secretary of State, I am only the designated employer of the British Rail and 1994 pensioners sections) and therefore have no responsibility for the funding of other sections.

“The department does not assess the funding positions of RPS sections. This is a matter for the designated employer and the RPS trustee. TPR, as the government’s independent regulator of workplace pensions, is responsible for monitoring the funding position of schemes to protect members’ pension benefits, reduce the risk of claims being made on the Pension Protection Fund and promote good pension scheme administration.”

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