Nicola Sullivan takes a trip with the fully funded London Overground Pension Scheme
London Overground Rail Operation’s final salary pension scheme harks back to a bygone era for retirement provision. Unlike many other employers, the train operator, which runs the rail network across 20 of London’s 33 boroughs (including North London and East London lines), is not being forced to close the scheme to future accrual, exclude new employees from joining or offload its liability risk on to an insurer.
Despite challenging financial markets and increases in life expectancy – factors that blight many other defined benefit pensions – London Overground’s scheme boasted a surplus of £2.1m at its last actuarial valuation in December 2010.
London Overground’s scheme boasted a surplus of £2.1m at its last actuarial valuation in December 2010
When London Overground took over from Silverlink Metro in 2007, the fortunate scheme’s previous deficit was plugged by its owners, two stakeholder firms and Transport for London. Its improved funding position has meant that in July London Overground was able to reduce both employee and employer-funded pension contributions without affecting the value of members’ pension pots.
In July London Overground was able to reduce both employee and employer-funded pension contributions without affecting the value of members’ pension pots
Higher contributing members, who opted for preferential early retirement rights when British Rail was privatised, saw contributions fall from 10.6% to 9.76%. Other members, who lack these preferential rights, saw their contributions fall from 10.6% to 9.28%.
Employer contributions for these two groups fell from 15.9% to 14.64% and 13.92% respectively. The reduction in contribution levels has resulted in significant savings for London Overground. However, the deal has not jeopardised the scheme’s long-standing contribution ratio, whereby 40% of pension contributions are paid by employees and 60% by London Overground.
The scheme’s actuaries said it was financially viable to cut contribution levels further, but London Overground wanted to exercise prudence in the current economic climate. Darren Hockaday, HR director at London Overground, says: “Contribution rates are 1.5% above what they need to be as per the last actuaries’ recommendation for the 2010 evaluation.”
Providing a buffer zone strikes a balance between maintaining this surplus position, which we obviously hope to do, and acknowledging that a lot of what’s happening in the financial markets is out of our control
He adds: “Providing a buffer zone strikes a balance between maintaining this surplus position, which we obviously hope to do, and acknowledging that a lot of what’s happening in the financial markets is out of our control.”
London Overground is not underestimating the negative effect on the scheme of volatility in the financial markets. The full impact of the past three years will come to light during its next actuarial valuation in December.
Hockaday says that London Overground will be closely monitoring the impact of reducing contribution levels in what is a challenging environment for pension schemes. A full valuation of the scheme is conducted every three years to monitor fund performance, active membership and the number of scheme retirees.
Administration and trustee services are provided by RPMI, which is owned by the Railway Pensions Trustee Company.
It is even more important for London Overground to ensure the long-term sustainability of the scheme, considering its membership will increase as a result of auto-enrolment. Although the scheme is well prepared for its staging date in May, it already automatically opts in new joiners into the defined benefit scheme, around 15% of its workforce is not in the pension scheme and therefore will need to be auto-enrolled in May.
A lot of people would give their eye teeth to go into a final salary pension scheme
The train operator briefly considered giving employees who opted out of the final salary scheme the option to join a career-average revalued earnings (Care) scheme, which would allow them to make lower contributions. But Hockaday says: “A lot of people would give their eye teeth to go into a final salary pension scheme. We decided not to provide any cheaper options.”
We can demonstrate to unions that we are good custodians and stewards of the scheme
Hockaday also says that it was likely the unions would have “shown some resistance” if another, less generous scheme, was introduced alongside the final salary scheme. He says: “It’s a good opportunity to strengthen relations. We can demonstrate to unions that we are good custodians and stewards of the scheme.”
Despite the fact that the pension scheme is so highly cherished by the unions, London Overground has to work hard to ensure employees understand its full value. Hockaday is continually reminding people that there is no better time to be a member of the scheme because contributions have been reduced.
Another aspect of the scheme’s appeal is that pension members are entitled to life assurance worth four times their annual salary
Another aspect of the scheme’s appeal is that pension members are entitled to life assurance worth four times their annual salary. If London Overground can run its pension scheme as smoothly as it did its rail network during the Olympics, then everyone will be winners