TfL pension review: No reason to change scheme, trustees and union say
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The Transport for London pension trustees and the largest trade union in TfL have come out in favour of keeping the £13.1bn scheme open to new members, responding to a call for evidence about the scheme’s future. What are their main arguments?
The transport system of the UK's capital city became the subject of a row about funding last year amid a passenger drop during lockdown, with the Conservative government demanding a review of TfL’s open final salary scheme as part of funding negotiations. In response, one of the unions in the scheme, the RMT, threatened to take strike action should any cuts to pensions or pay be made.
The pensions review is being independently led by Sir Brendan Barber and Joanne Segars OBE, both former trade unionists and well known in the pensions world. It started in August with a call for evidence; the TfL trustees and the Transport Salaried Staffs' Association have both submitted their responses.
Trustees expect scheme to be fully funded
The trustees argue strongly in favour of keeping the scheme open, saying that “any adverse changes to pension benefits will jeopardise the ability of TfL to recruit, motivate and retain its employees”.
The funding level, under assumptions used for the 2018 valuation, is currently estimated to be 100%, though the valuation as at 31 March 2021 is still ongoing. TfL pays about £370m a year to the scheme, or 33% of pensionable salary, it said in January, a level the trustees say has remained stable.
They believe that TfL is a strong employer because it is of high importance to London as an economic centre. The fact the scheme is open and the strength of the covenant allow the scheme to take a longer term approach to investments, they say; closing the scheme would force it to increase the level of prudence, increasing the cost to the employer.
TfL, in its financial sustainability plan published in January this year, said that the Pensions Regulator “is advocating increased level of prudence in DB schemes”, but the trustees take issue with this view: “For the avoidance of any doubt, the Trustee notes that Part 3 of the Pensions Act 2004 does not require 'increased levels of prudence and contributions in order to reduce risk over time'. The Trustee also does not accept that it is TPR’s focus for the Scheme. Although the Trustee acknowledges that, speaking generally, it may be correct to describe this as the focus of TPR, it should also be noted that the reason for this general focus is because the majority of private sector defined benefit schemes are, unlike the Scheme, closed to new entrants and/or future accrual.”
Over the past few years, the fund has put in place an equity options strategy and has been diversifying its holdings of equities and bonds by adding hedge funds, alternative credit and private markets. It is now two years into a four-year programme of divesting further from equities to move into a range of alternatives, the report notes, and agreeing “an ambitious ‘Carbon Neutral Journey Plan’ to further manage the reduction of carbon emissions over time”.
Environmental concerns are cited as a further factor in the strength of TfL’s covenant saying that TfL is “essential as part of UK Government’s target to achieve environmental sustainability".
Is TfL a political football?
Trade union TSSA also rejects the notion that changes need to be made to the pension fund. It warns about jumping to conclusions and has an accusation of bias in store: “Both the briefing at the first Contact Group meeting and the content and questions in the Stage 1 Call for Evidence have the effect of funneling thoughts and responses to accept that there is a need for change to the Pension Fund."
Any change to the pension fund would be likely to affect lower paid staff, women and younger workers more, it argues, “with the potential to raise equality issues that could lead to discrimination claims”.
TSSA criticises the apparent lack of a cost savings target from changing the scheme, saying that TSSA, along with other trade unions, had asked for an indication of the level of savings that were being considered in the fund and how that would then justify changes to benefits. “The response we received was that the Fund Review has no set figure in mind,” it says.
The union believes that some work has already been done on ways of changing the scheme and levels of savings have been considered but are not being shared openly, making the process intransparent and potentially undermining the credibility of the review.
Like the trustees, the TSSA shows concern that the TfL scheme is being considered as if it were a closed scheme which needed to substantially reduce dependency on the employer. The debate on whether open DB schemes should invest in lower risk assets and reduce their reliance on the sponsor accompanied the passage of the Pension Schemes Act through parliament, as well as the consultation on the new DB funding regime. TPR has since said it acknowledges that open schemes invest differently to closed schemes – as long as the covenant is strong.
But the covenant may be under threat from the current government funding policy, potentially forcing the scheme to adopt a lower risk investment strategy, which could then create a deficit situation, says TSSA.
The union implies that the reason for the issues between the government and TfL are political; London is one of the few remaining Labour bastions – and TSSA says the government is starving TfL of funding, making TfL the only major world city that does not receive a central government subsidy.
“Under Boris Johnson’s funding reforms, London remains the only major world city without central government funding for its transport network. These are highly politicised attacks on London’s transport network and transport workers and should be seen as such,” a TSSA spokesperson said.
TfL staff have faced real terms pay cuts over the past seven years and thousands of jobs have been cut, leading to retention problems and greater use of contractors, the spokesperson added.
“TfL salaries are not competitive in many job markets and the pension arrangements are often a reason for staff to join and to remain at TfL. We believe that reduction of the salary combined with the current pay freeze and ban on bonuses imposed by government could have a fundamental impact upon TfL’s ability to deliver services and infrastructure projects in the near future,” the spokesperson warned.
The Department for Transport appears unmoved by these arguments, believing that the pension scheme is outdated and in need of reform in the eyes of TfL’s own Independent Panel.
A DfT spokesperson said: “As part of the latest funding package, the mayor agreed to review TfL’s pension scheme with the aim of moving it into a financially sustainable position. We will await the outcome of the review.”
TfL did not comment further on the ongoing review either. A spokesperson for the transport operator said: “TfL’s funding agreement with government included a requirement to carry out an independent review of the pension scheme, with the aim of moving TfL’s Pension Fund into a financially sustainable position which protects members’ pension benefits built up to date. This review is ongoing and will consider all responses to the call for evidence.”
'A touch of jealousy’
Outside oberservers agree the TfL pensions saga is highly politicised. Speaking in a personal capacity, Ian Neale, director of policy specialists Aries Insight, says politics and “perhaps a touch of jealousy that any public sector workers should enjoy better pensions than others” seem to be part of it.
He believes there are “good reasons” why the TfL scheme is as it is, for example the importance of TfL as a service of strategic and economic importance. “The trustee company has presented a robust defence against suggestions that the projected future liabilities are unaffordable,” he says, highlighting its cash flow and expected funding improvement.
Neale points in particular to the trustees’ view on not judging long-term sustainability based on current market conditions, which they say are outside historical norms. This comment “might fairly be directed at other defined benefit scheme funding controversies, such as that surrounding the USS”, he adds.
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