Rail passengers may have thought that being told to abandon their journeys was bad enough. But that was not the only piece of bad news for the travelling public last week. The Government has quietly announced that train companies will need to improve the pension benefits for 36,000 rail industry employees – a move that could cost train operating companies up to 3% of their wage bill, and is likely to be used as an excuse to further increase rail fares.
Rail companies, like most other employers with defined benefit pension schemes, currently pay a lower rate of National Insurance contributions, as a result of the "contracted-out" status of their pension scheme. From April 2016 this option will be withdrawn, and all employers will need to pay the full rate of NI. Most employers will be able to offset the increase in NI costs by a corresponding change to the value of pensions being accrued in their defined benefit scheme – a change generally regarded as fair since, from the same date, employees will start building up more generous state benefits. However, many rail industry employees (together with employees from other former state-run industries such as the electricity industry) enjoy some robust statutory protection of their pension benefits.
John Broome Saunders, actuarial director at BROADSTONE, explains last week's decision: "Previously, there had been speculation that this legal protection would be relaxed to allow changes to schemes to offset these additional NI payments – but last week the DWP confirmed that there would be no such change. So rail companies are faced with a 3% hike in their NI bill, and train drivers get to enjoy unchanged benefits in their pension scheme, as well as extra pension from the state."
John Broome Saunders