RPS-CARE 2016 consultation Page 1 of 5
18 January 2016
Proposed Changes to the Network Rail Shared Cost Section (Network Rail Section) of the Railways Pension Scheme (RPS) and Network Rail CARE Pension Scheme (CARE Scheme)
Network Rail (NRIL) is committed to providing affordable and sustainable pension schemes for all employees over the long term. The purpose of this letter is to advise all Network Rail employees of proposed changes to the Network Rail Section of the Railways Pension Scheme and the CARE Scheme and to give you the opportunity to respond with your views, whether you are a current member of either scheme or not.
We are confident that these proposed changes, which have been discussed with trade unions and have been agreed by the relevant Network Rail Pensions Committee (RPS) and Trustee (CARE Scheme), are both necessary and in the best interests of members and the Company to help maintain sustainable pension schemes.
Why now?
As types of Defined Benefit arrangements, the RPS and CARE Scheme are required by law to carry out a valuation of the assets and liabilities of the schemes at least once every three years. This enables us to check whether there are sufficient funds to pay out benefits earned to date in the schemes and the ongoing costs; if necessary, we can then make adjustments to contributions or benefits to maintain adequately funded schemes.
In addition, from April 2016 as part of the State Pension reforms, the government is abolishing the current National Insurance (NI) contribution rebates for members of Defined Benefit pension schemes like our RPS and CARE Schemes. Based on current rates, this will see an increase in NI contributions of:
3.4% for Network Rail; and
1.4% for members.
We estimate this will cost Network Rail over £27 million per year which is simply not affordable if we are to meet our CP5 plans and targets. RPS and CARE Scheme members will on average pay an extra £9 per week in NI contributions when the rebate is withdrawn in April 2016 if their total yearly pay is over £40,000. RPS
The latest valuation of the RPS is as at 31 December 2013 and we have been working with the Trustee, the actuarial advisers and the trade unions for 18 months to identify an acceptable way forward. The valuation process was due to be completed by 31 March 2015, but this has taken longer than we had hoped to resolve.
The initial results of the valuation show the Network Rail Section was 99.1% funded on the statutory basis known as ‘technical provisions’. This suggests we have a well-funded scheme; however there are further cost pressures for Network Rail and RPS members that we also need to address.
Dear FIRST_NAME
TITLE INITIALS LAST_NAME ADDRESS_LINE1 ADDRESS_LINE2 TOWN_CITY COUNTY POST_CODE Potts_Job_ID / 4 /ROW
Network Rail Infrastructure Limited Registered Office: Network Rail, One Eversholt Street, London, NW1 2DN Registered in England and Wales No. 2904587 www.networkrail.co.uk Network Rail Infrastructure Limited Registered Office: Network Rail, One Eversholt Street, London, NW1 2DN Registered in England and Wales No. 2904587 www.networkrail.co.uk
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We have been discussing with RMT, TSSA and Unite how we can offset some of these additional costs through the RPS. We have now agreed an approach that settles the valuation and recovers the majority of extra National Insurance costs at this time.
CARE Scheme
The latest valuation of the CARE Scheme is as at 31 March 2015. The company has been considering the draft results in conjunction with the Trustee and has also been working on an approach to offset the additional costs associated with future State Pension reforms, which it has discussed with trade unions. In order to avoid unnecessary increases in pension costs for the company and members, changes need to be made by April 2016.
What are the proposed changes? A. RPS
The proposed changes to the Network Rail Section of the RPS are that from 1 April 2016:
1) The existing cap on future annual increases in pensionable pay is revised from RPI (Retail Prices Index) +0.5% to RPI only for all existing and new members (“the default approach”).
2) RPS60 Category 1 (fully protected) and Category 2 (non-protected including indefeasible rights)
members pay 40% Joint Contribution Rate (JCR) plus a fixed additional contribution that brings
member actual contribution rate up to the current rate (9.36%) of RPS60 Section Pay. The fixed additional contribution will therefore differ between Categories 1 (0.56%) and 2 (1.36%) and is permanently embedded into future member contributions at subsequent valuations. Employer
contributions are 60% JCR less the member fixed additional contribution.
3) RPS65 Category 3 members pay 40% JCR plus a fixed additional contribution that brings member
actual contribution rate up to the current rate (7%). This additional contribution will therefore differ from Categories 1 and 2 and will be 0.48% of RPS65 Section Pay; it will be permanently embedded into future member contributions at subsequent valuations. Employer contributions are
60% JCR less the member fixed additional contribution.
4) All active members of the RPS as at 31 March 2016 will be given a one-off opportunity, to be exercised by 30 June 2016, to elect for non-promotional salary increases beyond the proposed cap of RPI to be treated as pensionable for future pensionable service only from the date of salary change. For those choosing this option, this introduces a Pensionable Restructuring Premium for salary increases in excess of the RPI cap. Members choosing this option would increase their contributions by 1.78% of Section Pay (to be reviewed at subsequent actuarial valuations) on top of the amounts set out in paragraphs 2 and 3 above as follows:
a. RPS60 members: from 9.36% to 11.14%. b. RPS65 members: from 7.0% to 8.78%.
Members choosing this one-off option cannot choose to revert to the default terms at a later date. This opportunity will not be extended to employees joining the RPS after 31 March 2016.
5) The potential eligibility for an Incapacity Pension will increase - the requirement in the Rules for a member to have five years’ pensionable service in the NR Section of the RPS to be eligible to apply for an incapacity pension will be replaced with a requirement that it is the earlier of either five years’ company service or pensionable service.
6) In addition to the above changes for existing RPS members, a six-month window of opportunity will be provided for employees who did not previously take up the option to join the RPS on completing five years’ continuous company service. The option will be for future service only on the RPS65 terms.
B. CARE Scheme
1) With effect from 1 April 2016, the revaluation basis will change from RPI to CPI for future pension accrual, pension indexation in deferment and in payment. This approach would not impact pension accrued to the date of change which would continue to be revalued by RPI. This saving will depend on the assumption adopted for CPI relative to RPI that will be subject to agreement between the Trustee and the sponsoring employer, Network Rail.
2) Pension contributions are expected to reduce from 1 April 2016 until the next actuarial valuation as
follows:
a. Member contributions will reduce by 1.28% from 7.2% to 5.92%.
b. Company contributions will reduce by 2.02% from 10.9% to 8.88%.
Do these changes apply to the NRDC pension scheme?
No, they only apply to current and future members of the Network Rail Section of the RPS and the CARE Scheme.
How can I find out more?
You can find out more by reading the additional information set out in the Appendices to this letter.
How can I give my feedback?
If you have any comments, these should be received no later than 21 March 2016, and you should send them to: Chris Hannon, Head of Pensions, Furzton Building (Floor 1), The Quadrant: MK, Elder Gate, Milton Keynes, MK9 1EN.
What happens next?
We will consider any feedback from employees and trade unions before making a final decision by the end of March. Once we have done so, we will seek to finalise the valuation with the appropriate Trustees and introduce the changes from 1 April 2016.
We will confirm the outcome from these proposals in an announcement on the Network Rail pensions website, www.myNRpension.co.uk, and on Connect at the end of March 2016.
Yours sincerely
Ian Iceton
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Appendix A
Proposed Changes to the Network Rail Section of the Railways Pension Scheme (RPS) – the Detailed Information
1) Change to annual pensionable earnings cap – “the default approach”
From 1 April 2016, change the current annual pensionable pay cap from a maximum of Retail Prices Index (RPI) +0.5% per year, to a maximum of RPI per year. RPI is the annual change over the year to each September as published by the Office for National Statistics (ONS). RPI for the year to September 2015 was 0.8%. The reference period for the annual pensionable pay cap will continue to be 1 April to following 31 March. The annual pensionable pay cap applies to all Network Rail Section members (including ‘protected persons’).
The current treatment of promotional pay increases will not change; promotional increases arising as a result of a change in Grade/Band/Role Level will count for future service only, known as a Pensionable Restructuring Premium.
2) What does this mean for existing Network Rail Section members’ contributions?
Member contributions will continue to be payable at their current rate until the next actuarial valuation, unless members elect by 30 June 2016 to pay the higher contribution rate. While member contribution rates will not change, a fixed additional contribution rate within the total member contribution will be used to reduce the total employer contribution and will be included following future actuarial valuations.
Contributions proposal from 1 April 2016:
Member % Employer (Network Rail) %
RPS60 Category 1 (protected) 9.36 12.64
RPS60 Category 2 (including non-protected & Indefeasible Right)
9.36 10.64
RPS65 Category 3 7.00 9.30
3) Option to have non-promotional increases above RPI as pensionable
Existing RPS members may elect by 30 June 2016, to pay a higher ongoing contribution rate in order to have non-promotional pay increases beyond RPI to be treated as pensionable for future service (from the date of salary change); this is known as a Pensionable Restructuring Premium. This is a one-off option; any member choosing the higher contribution option will not be able to subsequently revert to the lower default contribution arrangement. The additional 1.78% member contribution will be added to the member contributions shown in the table above, and will be reviewed at future actuarial valuations by the Scheme Actuary, as with the normal ongoing member contributions.
4) Amendment to the five-year qualifying period for incapacity pension applications
From 1 April 2016, we propose to replace the requirement in the Rules for a member to have five years’
pensionable service in the NR Section of the RPS to be eligible to apply for an incapacity pension, with a
requirement that it is the lesser of either five years’ continuous company service or pensionable service. This will enable more members to apply for an incapacity pension than under the current terms, however any member applying must still meet the definition of incapacity in the Rules of the RPS before an ill-health early retirement pension can be granted by the Trustee.
5) Non-RPS members who previously did not take up the opportunity to join RPS
A six-month window of opportunity will be provided for employees who did not previously take up the option to join the RPS on completing five years’ uninterrupted company service to do so for future service. Such employees will be able to apply for membership on the RPS65 terms from 1 April to 30 September 2016, after which the opportunity will lapse.
With the exception of the changes set out above, all other provisions of the RPS remain the same subject to changes in legislation.
Details on how the options set out in paragraphs 3) and 5) above may be exercised
can only be made available once this statutory consultation has been completed.
Appendix B
Proposed Changes to the Network Rail CARE Pension Scheme – the Detailed Information 1) Change in Revaluation from RPI to CPI
With effect from 1 April 2016, there will be a change in the revaluation basis from RPI to CPI for future pension accrual, pension indexation in deferment and in payment.
RPI (Retail Price Index) and CPI (Consumer Price Index) are the annual change over the year to each September as published by the Office for National Statistics (ONS) based on different goods and services and patterns of consumer spending. CPI is now the more generally accepted accurate measure of price inflation. It is typically lower than RPI and for the year to September 2015 was -0.1% when RPI was 0.8%. As under the current CARE Scheme Rules, any negative inflation will not reduce the value of your pension.
This proposed change in indexation will not impact pension accrued [already built up] to the date of change which would continue to be revalued by RPI.
Please refer to your Member’s Guide for more information on how revaluation works in the CARE Scheme. You can access the CARE Scheme Member’s Guide from www.myNRpension.co.uk
2) Change in contribution rates
Pension contributions are proposed to reduce from 1 April 2016 as follows:
a. Member contributions will reduce by 1.28% from 7.2% to 5.92%.
b. Company contributions will reduce by 2.02% from 10.9% to 8.88%.
The change in contribution rates reflects, among other matters, the change in indexation of future benefits from RPI to CPI, which lowers the total cost. Contribution rates will be reviewed again following the next actuarial valuation of the CARE Scheme.
We believe that the above approach provides a pragmatic way forward which will allow the reduction in member and employer pension contributions to offset the increased National Insurance contributions of 1.4% and 3.4% respectively from April 2016 and therefore maintain a sustainable pension scheme.
