Stagecoach Group has defended its decision not to accept the pensions risk of the Railways Pension Scheme after it was excluded from three rail franchise bids by the Department for Transport (DfT).

In an update published today, 2 May, the transport group hit back at the DfT for not accepting its pension position, which it said would have placed “unknowable risk” on the company, adding that it was right “not to accept” the requirements which it estimated carried in excess of £1bn of risk.

According to Stagecoach, the DfT’s protection “was limited to” the 2019 scheme valuation, deficit contributions and employer contributions, meaning the successful operator would take full risk of contribution increases arising from 2022 and all subsequent valuations.

RPS is estimated to have a deficit of up to £7.5bn across all of its sections.

Stagecoach evaluated that the DfT’s position would mean an additional bidding cost of £81m for the East Midlands franchise, £167m for South Eastern and £102m for the West Coast Partnership.

Additionally, it calculated further downside risk of £319m, £358m and £589m respectively, accounting for 20 per cent fall in the value of the pension schemes assets a reduction in the discount rate applied to liabilities from 5.7 per cent to 2.7 per cent.

In its update, Stagecoach said: “Notwithstanding the disqualifications, we continue to believe we were right not to accept the pensions position sought by the Department for Transport and that to have done so would have been to take on unknowable risk and been contrary to the success of the company and also contrary to the interests of employees, customers and the franchise. 
 
“While a parent company's liability to any particular UK rail franchise should be limited to its risk capital (principally, performance bond and loan commitments), an exhaustion of that parent company risk capital, in our view, is not desirable for customers, employees or the relevant franchise. 

“We experienced this first hand through our involvement in the Virgin Trains East Coast franchise.” 

Under the current structure, each section of the RPS operates a shared cost basis with the employer responsible for 60 per cent of total contributions with the employees responsible for 40 per cent.

“No train operator has been held responsible for any scheme deficit remaining at the end of its franchise and nor has it had any entitlement to benefit from any scheme surplus at the end of the franchise,” it added.

Following disqualification, the DfT insisted that it was just Stagecoach which had changed the terms of the franchise competition, leading to a bid “which proposed a significantly different deal to the ones on offer”.

Last month, the National Union of Rail, Maritime and Transport Workers (RMT) warned of co-ordinated action over any threat to pensions, following the “fiasco” over Stagecoach and Virgin being banned from the franchise lottery.

Pensions Age has contacted DfT for comment.

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