Stagecoach disqualified from three franchise competitions

[Captain Bigwig]

It is probably one of, if not the most iconic train company we have seen.

Remember, you're just taken in by the marketing.

In practical terms I suspect these are synonyms. An iconic brand is one whose marketing successfully "takes in" a lot of people.

 

[Bletchleyite]

In practical terms I suspect these are synonyms. An iconic brand is one whose marketing successfully "takes in" a lot of people.

True, but it also helps that it is (and I'm a frequent user) one of the better-run TOCs as well. As was proven with things that haven't gone well for him, just because you slap Virgin on something doesn't mean it's actually any good.

I'm not saying First Horizon Trains would have been rubbish (as despite my general dislike for the pinky-purply mob local management has more impact than the owing group, and GWR IC isn't *that* bad) - but VTWC has been pretty good overall and has delivered on much of what was promised.

 

[LNW-GW Joint]

It's worth saying that even if Stagecoach/Virgin/SNCF had not been disqualified from the WCP competition yesterday, they would not necessarily have won.
Virgin was already more likely to be facing the exit than staying on.
It just reduces the options for DfT, and may have reduced the commercial value of the remaining bids.
Virgin will have had nearly 23 years on the WCML by the end (barring further direct awards).
The LMS only had 25 years.

 

[StaffsWCML]

More on the Pensions storm. Complete and utter shambles again from the government. No surprising though. All should be put on hold whilst they get a grip.

https://www.bbc.co.uk/news/business-47885971

Train companies face a pensions black hole of up to £7.5bn, the Pensions Regulator has warned.

The warning was made in a letter to lawyers representing the rail industry trade body, the Rail Delivery Group.

The issue has burst into the open after it led the Department for Transport (DfT) to bar Stagecoach from bidding for three franchises.

Virgin Trains, in which Stagecoach owns 49%, is likely to cease operations as a result.

Stagecoach said it had been told the exclusion was because of its refusal to shoulder responsibility for unquantified extra pension contributions.

It said the decision was evidence that the current system of rail franchising "was not fit for purpose".

The Pensions Regulator has been investigating a potential shortfall in train company pensions for some time.

In a letter sent last June during discussions with the industry about a possible funding solution, it said the deficit "has increased from £4.8bn to £7.5bn in just three years (which drives our desire to ensure substantially more cash is paid into the sections, commencing in the short term)".

The regulator noted that the DfT "has remained consistent that the [pension schemes] are sponsored by privatised companies that must take responsibility".

'Severe' consequences
The letter was sent to Calum Cooper, a partner in the pensions consultancy Hymans, which has been advising the Rail Delivery Group.

The group came up with a proposed solution that would have involved splitting the cost between train companies and the DfT.

On 1 April, the chief executive of the Rail Delivery Group, Paul Plummer, wrote to Rail Minister Andrew Jones, urging him to adopt the scheme.

If he did not, Mr Plummer said, the consequences would be "severe".

The Pensions Regulator might demand an immediate £2.6bn increase in contributions, Mr Plummer said, and the ability of the DfT to award future franchises would be put in jeopardy.

"Ultimately there could be a very significant impact on the taxpayer through adverse financial impact on franchise bids," he said.

"There would almost certainly be widespread industrial action, with the significant disruption to customers, cost and reputational damage that goes with it."

Rail Delivery Group sources said the government had not yet replied to its proposal.

The DfT said it had "total confidence" in its franchise award process.

It said Stagecoach did not accept the "risk-sharing mechanism" it had proposed for the three franchises and that it had "proposed significant changes to the contracts".

"DfT could not accept these changes and operate a fair competition," the department said.

 

[DarloRich]

It is probably one of, if not the most iconic train company we have seen.

And? What will chnage? The people, trains, services, track, overhead wires everything except having Virgin plastered on the side of the trains and the childish hype will remain. The people who run the trains are the important thing, not the colour of the paint. It really isnt the end of the world.

Funnily enough i see a very large amount of virgin staff at both Euston and New Street, both national rail stations

ok. they will still be there just wearing a green coat rather than a red one.

 

[theageofthetra]

More on the Pensions storm. Complete and utter shambles again from the government. No surprising though. All should be put on hold whilst they get a grip.

https://www.bbc.co.uk/news/business-47885971

How did this shortfall happen, and why weren't the regulators all over it?

 

[DarloRich]

Question is are the 'rules' of said 'competition' fair? Its a bit like entering a competition to win 100k and being told when you win that actually you have to pay the person running the competition 150k. Like when companies convince people to dial a £1.50 a minute number to win a rubbish car.

but that isnt the case here. The rules are clear and fair and apply equally to all. As I said previously lets see if Stagecoach sue. That will be the barometer of fairness or otherwise.

The government, Grayling and the franchising system are an absolute joke. The whole lot should be put on hold awaiting the results of the Williams report. Its crazy to still be dishing out franchises now when it may all change. Williams could even suggest it is better to renationalise the lot.

but he isnt going to is he? He is, I suspect, going to encourage further and deeper alliance type arrangements.

If the government want train operators to foot the bill for pensions for staff they may only have on their books for 8 years, they need to reconsider how long a franchise should be issued for, which I believe Branson for his faults has raised previously. Longer franchises (if franchises are a good idea at all?) would allow more long term investment and planning, and a say a 15 year franchise might make it more appealing for companies to accept the pensions liabilities also. Why the hell would any sane private company want to take on pensions liabilities for staff who used to work for a different organisation during most of their service?

I get that point - however the rules were clear. Stagecoach did not submit a bid that matched those rules. Other bidders did. We must assume they understood and accepted the risk. I suspect Stagecoach thought no one would agree to such terms and they could therefore use this point as leverage.

I am not sure First are in great shape financially to take this on, MTR are hauled up in Hong Kong on corruption, what impact could that have. Not exactly looking like a glowing future for the West Coast Main Line which has been one of the better services out there. I really think grayling will end up with Egg on his face here 'again' it will be like his issuing a ferry contract to a company with no ferries for instance.

As i said previously the people make the franchise work and they wont change.

 

[Bletchleyite]

More on the Pensions storm. Complete and utter shambles again from the government. No surprising though. All should be put on hold whilst they get a grip.

https://www.bbc.co.uk/news/business-47885971

This:

Virgin Trains, which is majority-owned by Stagecoach, is likely to cease operations as a result.

is shoddy journalism. VT is not going to "cease operations" in the manner of a failing airline as this implies. The Pendolinos will continue up and down the WCML whoever runs them.

 

[StaffsWCML]

How did this shortfall happen, and why weren't the regulators all over it?

Many years of poor management of funds going back to BR, Final Salary pensions which have been judged by many to be unsustainable for companies to provide for.

but that isnt the case here. The rules are clear and fair and apply equally to all. As I said previously lets see if Stagecoach sue. That will be the barometer of fairness or otherwise.



but he isnt going to is he? He is, I suspect, going to encourage further and deeper alliance type arrangements.



I get that point - however the rules were clear. Stagecoach did not submit a bid that matched those rules. Other bidders did. We must assume they understood and accepted the risk. I suspect Stagecoach thought no one would agree to such terms and they could therefore use this point as leverage.



As i said previously the people make the franchise work and they wont change.

No one knows. One of his recommendations given the relative success of the LNER could be but who knows?

I think the rules are bad, franchising is broken as it stands.

The other companies I fear have absolutely no idea what a mess they are getting into, likewise the government. Stagecoach I feel were trying to be responsible to protect their staff, and the services.

I am not certain MTR or First have been so diligent. I would put money on this kind of nonsense causing a major franchise failure in future if they continue on this path. Who knows what impact that could have.

First are already haemorrhaging money, I think the are gambling on this being some kind of golden ticket as it is highly profitable. The likely winner here seems to be MTR who are another company embroiled in corruption scandals back home. Good for British railway customers I am sure.

The motivation of the people could change, service levels could change. I wouldn't have much faith in First to improve much given their track record, MTR are very much an unknown here but I think they are naïve in their understanding of the antiquated British Rail Network, the power of the Unions to make life difficult for their members and management (weekend staffing), staff stuck in BR ways, and various other challenges they most likely don't encounter in HK/China.

VT has quite consistently topped customer satisfaction ratings. Yes the people maybe good but the management whatever their faults maybe motivate/support/train these people, the company ethos is for better service despite the numerous challenges by all. I am not quite sure many other companies will delivery quite the same levels.

 

[Antman]

procurement rules. And procurement. A joke.

What usually happens is the cart leads the horse. The price they want sets everything else. You will be told that the best bid wins, but the weighting on pricing means the cheapest wins.

A tender goes out. The information in it is wrong, missing or misleading (ALWAYS in commissioner favour). Everybody knows this. From all sides. There will be huge gaps in the specification. You will ask countless CQs (clarification questions). and they will be answered inadequately or not at all. Quite often, by answering one question (which will be a pass/fail) you will by definition have to fail another one - so You fudge it to avoid being automatically disqualified.

You will be told the contract is nonnegotiable - and will be required to sign to say you accept that your tender is binding on those terms. Those terms will be practically undeliverable. And the contracts are daftly one sided (there is no point making a procurement so ridiculous it will fail mid term / but the public sector does it time and again...). Side letters are signed, discussions go on post award to try to fix the problems and get comfort. Sometimes sorted, sometimes not.

You know the envelope is impossible to deliver. All bidders do. So you put in a compliant (fantasy) Bid and a realistic non compliant alternative one. Everyone does it so often.

You can say “fine, so don’t bid”. How does that help? It just means that the most gullible, aggressive, naive or cynical bidder who may not be the best provider, is likely the last man standing. Relying on (in rail procurements) changes and cockups from people like NR to sort you out or to have to threaten to walk later unless the problems are sorted. it doesn’t lead to a good procurement result or service delivery.

And you can never get common sense out of those running the procurement - sensible people magically seem to become automatons and people just folllowing orders. Despite you knowing they are not that when the other side of the fence. And no one ever has the balls to man up and say “look this is a shocker and unrealistic, because no one dare go back to on high and tell the truth.”

 

[HouseOfCommons]

An urgent question on this issue has just been asked in the House of Commons by Clive Betts MP. You can watch it, along with the Minister's response and subsequent debate on parliamentlive.tv.

You can find out more about urgent questions here.

 

[krus_aragon]

An urgent question on this issue has just been asked in the House of Commons by Clive Betts MP. You can watch it, along with the Minister's response and subsequent debate on parliamentlive.tv.

You can find out more about urgent questions here.

That's a very useful link, leading directly to the timestamp of the relevant question. Good work on the user interface / usability!

 

[ainsworth74]

I think if it was pointed out that the trains will still run, the timetable will almost certainly be the same (give or take) and even the happy staff will just be wearing new uniforms, the publicity Richard has been getting since issuing that press release might drop.

And it can be pointed out the LNER took over seamlessly post VTEC now so harder to play that card again. LM to WMT will also be visible to many in the VirginWC patch.

You know I do wonder if a factor in the "loyalty" exhibited is down to the fact that Virgin Trains have been running this group of services since 1997? That's nigh on twenty-two years! What proportion of their passengers (regular, semi-regular and once in a blue moon) actually have clear memories of anything other than Virgin Trains running their train from Manchester to London? I bet it's quite a small proportion by this point, indeed I'd go so far as to say I bet it's the case that the majority of their passengers only know Virgin Trains and I suspect that that is feeding into this loyalty. They don't know what a franchise changeover is like. They don't know that it will be the same trains, the same staff, the same timetable, the same coffee and the same fares (at least for a little while) once the change occurs. Obviously the information is out there and it's easy to disprove that Virgin will take the trains with them to be replaced by Pacers (a claim I saw doing the rounds when First won back in 2012) but Virgin are hardly likely to educate them are they?

Compare the situation to Intercity East Coast where in ten years we've gone through National Express East Coast, East Coast, Virgin Trains East Coast and now London North Eastern Railway. Heck if you look back thirteen years we've gone through Great North Eastern Railway as well to give five different companies! People over here are well aware that when the name changes on the side of the train nothing fundamentally changes overnight so there isn't that sense of loyalty to them as there isn't as much fear of the unknown. People are well aware it'll the same timetable, the same trains, the same staff and the same coffee after the change.

 

[Bletchleyite]

VT has quite consistently topped customer satisfaction ratings. Yes the people maybe good but the management whatever their faults maybe motivate/support/train these people, the company ethos is for better service despite the numerous challenges by all. I am not quite sure many other companies will delivery quite the same levels.

What needs to be borne in mind is that VT in its current form (i.e. led by Virgin Rail Group) was always going to end this year anyway. The "new" VT would have been a Stagecoach operation more like VTEC, EMT, SWT or whatever. While I do generally like the Stagecoach TOCs, EMT is nowhere near as good as VTWC, and nor was VTEC while it lasted.

I would be very happy for the Virgin Rail Group controlled organisation to continue on the WCML, I think they are possibly the best TOC, if not they are well up there, and they would be that even if the Virgin branding wasn't present. But that isn't what most people are thinking of.

 

[LNW-GW Joint]

Mark Francois taking an opportunity to lambast Abellio (and his own SoS Chris Grayling) over their GA performance, instead of his usual enraged turf of Brexit policy.
I see Grayling was sat next to his minister Andrew Jones who job it was to spout the blandishments.

I think Andrew Jones just said that Abellio put in the best bid for EM, regardless of compliance issues.

 

[hwl]

You know I do wonder if a factor in the "loyalty" exhibited is down to the fact that Virgin Trains have been running this group of services since 1997? That's nigh on twenty-two years! What proportion of their passengers (regular, semi-regular and once in a blue moon) actually have clear memories of anything other than Virgin Trains running their train from Manchester to London? I bet it's quite a small proportion by this point, indeed I'd go so far as to say I bet it's the case that the majority of their passengers only know Virgin Trains and I suspect that that is feeding into this loyalty. They don't know what a franchise changeover is like. They don't know that it will be the same trains, the same staff, the same timetable, the same coffee and the same fares (at least for a little while) once the change occurs. Obviously the information is out there and it's easy to disprove that Virgin will take the trains with them to be replaced by Pacers (a claim I saw doing the rounds when First won back in 2012) but Virgin are hardly likely to educate them are they?

Compare the situation to Intercity East Coast where in ten years we've gone through National Express East Coast, East Coast, Virgin Trains East Coast and now London North Eastern Railway. Heck if you look back thirteen years we've gone through Great North Eastern Railway as well to give five different companies! People over here are well aware that when the name changes on the side of the train nothing fundamentally changes overnight so there isn't that sense of loyalty to them as there isn't as much fear of the unknown. People are well aware it'll the same timetable, the same trains, the same staff and the same coffee after the change.

On the one hand I agree with that no many can remember much pre Virgin (I only did about 12 trips on WCML IC pre Virgin) but with recent changes at Northern, TPE, WM, W&B I think many will have seen the changes or rather lack of real change on hand over.
The spread of information on the internet has also changed much in the last 7 years. So Virgin might not be able to do the similarly now.

 

[Realfish]

In practical terms I suspect these are synonyms. An iconic brand is one whose marketing successfully "takes in" a lot of people.

That's a bit condescending (a bit like, 'Leavers not knowing what they voted for').

VT has a high level of satisfaction from people who actually have experience of using their trains. And it's not simply down to Pendolinos and the timetable changes, VT delivered a different culture and it's that, that differentiates them, in my opinion, from other TOCs I use. I always take the opportunity to chat with the crew, they are mostly more engaged and enjoy what they do. While a couple of contributors here seem to have an irrational dislike of VT, I have a choice of which TOC I use to travel to London, VT is always my first choice. I'm sorry to see them leave the field.

 

[Robertj21a]

Can't help but think we really can't afford to lose a quality operator like Stagecoach - far more professional and generally competent than many. Even so, they may have now avoided a disastrous financial situation resulting from the need for an 'open cheque' for pensions.

 

[Agent_Squash]

Patrick McLoughlin also seeming to question the competence behind the decision, only to be given a non answer by the Minister. He dealt with the aftermath of the West Coast fiasco, and will know what the Government will have opened themselves up to here - private UK companies will be pushed out of the market leading to, as McLoughlin said in his question, 'increasing the state ownership of our railways, albeit by other states'.

Hopefully this pushes Grayling closer to if not out the door. There is no way you can reasonably justify private companies taking on such huge, uncosted obligations for just 7 years potentially.

 

[Carlisle]

True, but it also helps that it is (and I'm a frequent user) one of the better-run TOCs as well. As was proven with things that haven't gone well for him, just because you slap Virgin on something doesn't mean it's actually any good .

True, you could also claim any user of C2C for example who regularly travelled in Network South East days has experienced improvements of equal magnitude despite being nothing to do with Virgin

 

[43096]

I get that point - however the rules were clear. Stagecoach did not submit a bid that matched those rules. Other bidders did. We must assume they understood and accepted the risk. I suspect Stagecoach thought no one would agree to such terms and they could therefore use this point as leverage.

This is not some last minute thing though - Stagecoach have been telling DfT that they would caveat the bid throughout the process and DfT have said nothing until now. Furthermore the SouthEastern competition is stalled because of the pension issue with all bidders.

Stagecoach now have nothing to lose - suspect the lawyers are looking at this very carefully.

 

[ForTheLoveOf]

This is not some last minute thing though - Stagecoach have been telling DfT that they would caveat the bid throughout the process and DfT have said nothing until now. Furthermore the SouthEastern competition is stalled because of the pension issue with all bidders.

Stagecoach now have nothing to lose - suspect the lawyers are looking at this very carefully.

Andrew Jones made clear several times during the questions that Stagecoach had been informed of their non-compliance, and had acknowledged it, to the Government. On that basis alone I don't see that they have a case, but then again the legal intracacies are rarely logical to an outsider!

 

[EE Andy b1]

Stagecoach now have nothing to lose - suspect the lawyers are looking at this very carefully.

Well Stagecoach and Virgin have been there before (2012) and they won that round, so i think they'll be taking any action they can if possible.

 

[DarloRich]

This is not some last minute thing though - Stagecoach have been telling DfT that they would caveat the bid throughout the process and DfT have said nothing until now.

OK - you can tell me all you like you wont meet the rules. Am I obliged to say anything? I suspect there are two sides to every Chinese whisper!

 

[AndrewE]

Many years of poor management of funds going back to BR,

that is a knee-jerk bit of abuse that I suspect you couldn't justify. Even in BR days when it was being mocked in the Sun and the Mail for investing in medieval furniture etc I was told by a friend in the industry that it was one of the most highly-regarded funds and recognised as doing just about everything right.
Try reading this: https://www.rpmirailpen.co.uk/awards/

2019
WON
PENSIONS AGE AWARDS
Best Investment Strategy

ALTERNATIVE INVESTMENTS INSTITUTE PEER-TO-PEER AWARDS
Best Use of Hedge Funds
Andrea Ash

2018
WON
INSTITUTIONAL INVESTORS ALLOCATORS’ CHOICE AWARDS
Partnership of the Year for Capital Constellation

CHIEF INVESTMENT OFFICER – POWER 100
Paul Bishop

INSTITUTIONAL INVESTOR
Best use of private equity

PENSIONS AGE AWARDS
European Pension Fund of the Year

PENSIONS AGE AWARDS
Best Investment Strategy

PROFESSIONAL PENSIONS WOMEN IN PENSIONS AWARD
Pension Manager of the Year
Victoria Bell

Final Salary pensions which have been judged by many to be unsustainable for companies to provide for.

As has been said earlier, because any surplus has been seen as an excuse to stop employer contributions, ratcheting down the fund value regardless of the need to allow for a spell of poor investment returns.
In fact over the last 4 or 5 years I think the investments have been appreciating well ahead of inflation (like by a factor of 2 or 3) as the awards above probably confirm.
It has also been pointed out upthread that contributions are low in a historical context, and are nowadays too low to deliver what people will want in the longer term. It's all part of the "give it to me NOW" culture that people have been led to imagine is their right. Hence the change to defined contribution schemes where the city still gets its pound of flesh playing the markets with pension fund assets, but the hapless punters will just have to put up with what is left over at the end of it, even if it is less per week than they put in!

 

[StaffsWCML]

Mark Francois taking an opportunity to lambast Abellio (and his own SoS Chris Grayling) over their GA performance, instead of his usual enraged turf of Brexit policy.
I see Grayling was sat next to his minister Andrew Jones who job it was to spout the blandishments.

I think Andrew Jones just said that Abellio put in the best bid for EM, regardless of compliance issues.

Problem is putting in a 'Compliant' bid and actually delivering any of the things they 'claim' to be providing are 2 very different things. So far Abellio's record has been pretty awful yet they keep getting awarded more franchises. Virgin and Stagecoach are 2 of the higher rated in customer satisfaction surveys, it is unfortunate that they will not longer be operating. People can say a badge can change on a uniform but long term better management will lead to a better service. The franchises are way too short.

At the end of the day the government should also be considering existing performance, Abellio is awful and will most likely continue to be so. Any provided with rubbish performance should be barred from even putting a bid in.

I could set up a company called shonky trains ltd tomorrow and tell Grayling that I am going to buy lots of fancy new trains, have free Wi-Fi, lots of carriages, take on the full pensions liability. Knowing full well all of that is impossible to deliver. The whole process is dishonest! Will anyone hold them to account if they don't deliver new trains?

This is not some last minute thing though - Stagecoach have been telling DfT that they would caveat the bid throughout the process and DfT have said nothing until now. Furthermore the SouthEastern competition is stalled because of the pension issue with all bidders.

Stagecoach now have nothing to lose - suspect the lawyers are looking at this very carefully.

Any company that signs up to these franchise agreements is led by morons quite frankly. To take on potentially full pensions liability for 8 years of a franchise you may not win again based on changing goal posts is corporate suicide. ​

 

[StaffsWCML]

that is a knee-jerk bit of abuse that I suspect you couldn't justify. Even in BR days when it was being mocked in the Sun and the Mail for investing in medieval furniture etc I was told by a friend in the industry that it was one of the most highly-regarded funds and recognised as doing just about everything right.
Try reading this: https://www.rpmirailpen.co.uk/awards/


As has been said earlier, because any surplus has been seen as an excuse to stop employer contributions, ratcheting down the fund value regardless of the need to allow for a spell of poor investment returns.
In fact over the last 4 or 5 years I think the investments have been appreciating well ahead of inflation (like by a factor of 2 or 3) as the awards above probably confirm.
It has also been pointed out upthread that contributions are low in a historical context, and are nowadays too low to deliver what people will want in the longer term. It's all part of the "give it to me NOW" culture that people have been led to imagine is their right. Hence the change to defined contribution schemes where the city still gets its pound of flesh playing the markets with pension fund assets, but the hapless punters will just have to put up with what is left over at the end of it, even if it is less per week than they put in!

You are correct. I think my comment above may have come across incorrectly. The railway pension is indeed one of the best out there and what is paid in is well handled. What I meant was pretty much as you have stated the investment by whoever companies or staff hasn't been done correctly, we haven't recently paid in enough to these pensions, public or private. It has been the death of many business recently. It will continue to be a problem.

Passing the liability and any perceived deficits in Rail Franchises definitely isn't the answer.

Of course there are many questions about whether people can afford to live now on what they are paid hence the 'give it me now culture', should pay increase should employers contribute more to pensions. Who knows?

The government have got a lot wrong recently, one thing I do support them on is the action on Auto enrolment, that was a sensible, responsible move. This year the minimum contributions will rise to 8% of salary, while this is arguably still not enough it is a lot better than it was.

 

[43096]

OK - you can tell me all you like you wont meet the rules. Am I obliged to say anything? I suspect there are two sides to every Chinese whisper!

So you just accept any commercial terms DfT throw at you? Contracts are a negotiation.

If a bidder makes you aware of an issue like this from the start then the organisation placing the contract really ought to tell them back at the start rather than letting them carry on. At best DfT have been amateur and unprofessional.

 

[tbtc]

Funny how things change.

Seems like only yesterday that people were complaining that private companies were over-bidding for franchises, promising huge revenue for the Treasury, safe in the knowledge that they could renegotiate after a couple of years so that the onerous repayment schedule (especially in the final few years of the franchise) wouldn’t be honoured.

Now people are complaining that private companies are too cautious, unwilling to sign up to an open ended guarantee that could cost tens of millions of pounds more than expected over the cost of the franchise.

Given the changes to life expectancy etc over the last generation, can you blame Stagecoach for not promising to honour pension debts relating to liabilities from before they took over the franchise? Would you do the same if you were a private company? Is it reasonable to expect private companies to do so? Would you take over an ongoing concern (be that a window cleaning round or a Subway franchise or a multi-million-pound facilities management contract) without nailing down the historic costs that you may be liable for?

I expect that the reaction of more than a few on here will be to blame Stagecoach, say that they shouldn’t be involved in bidding for franchises, we shouldn’t have private firms, everything should be nationalised etc etc. But that’s not a reason to blame Stagecoach for their decision.

To put things into some context, a final salary scheme (like the Railways one) is valued every three years to see how the assets compare to the liabilities. As I understand it, assets need to be within five percent of liabilities (and, if not, there needs to be a clear plan to fund a deficit *or* to use a surplus to increase/enhance benefits). The net present value of the assets may be relatively easy to quantify – the liabilities less so, because the pensions are guaranteed so any change in life expectancy can have a huge impact upon the funding positon.

Say you have a member who worked forty years and finished on a salary of thirty thousand pounds per year (hopefully not an unreasonable example, given some driver wages – I’m trying to use relatively “middle ground” figures rather than extreme ones). So, that member would have an annual pension of around two thirds of their final salary, which would be twenty thousand pounds per year.

How much should the Actuaries set aside for that? Maybe four hundred thousand pounds (i.e. £20,000pa over an average twenty year life expectancy for people at retirement age)? You can discount that a little because you expect that investment growth will allow, say, £350,000 today to cover the cost because most of that money is going to be invested for a long time before it needs paying to the member, so you might make £50,000 growth in that period? However, the pension is guaranteed to go up with inflation so you’ll have to set some money aside to cover twenty years of annual increases. You get the idea…

Whilst life expectancy may only change by what look like small amounts, it can have much bigger impacts upon pension schemes. For example, if life expectancy goes up from 85 to 86 then that’s less than 1%, doesn’t sound like much. But, for a pension scheme where people retire at 65, that’s the difference between someone having twenty years of pension versus twenty one years, a five percent difference. In a large scheme like the Railways one, a seemingly minor change like that that can mean hundreds of millions of pounds.

Once the valuation is carried out, the Actuaries decide how much additional money is needed to fund any shortfall. In a scheme that’s only ever had one employer, that’s obviously a decision for that company – you could argue that a hundred million deficit today is mainly because they should have been funding the scheme better in previous years so that’s a responsibility for that company.

It’s a bit different in the railway scheme – in the case of Stagecoach winning the South Eastern franchise, any shortfall today is partly a result of how the scheme was funded under British Rail/ Connex/ Go-Ahead etc. But those organisations aren’t going to put *their* hands in their pockets to fund the deficit, so all of that is expected to fall to Stagecoach?

Serious question – would you bid for a franchise if you were potentially liable to pay tens of millions of pounds that relate to liabilities accrued over the decades before you took over? Do you expect professional businesses to take on contracts with such open ended liabilities? You might put together a competitive bid based on ticket revenue and operating costs and then find your finances torpedoed by something from the past and expected to write a blank cheque?

Easy to bash Stagecoach (for some on here it feels like an obsession) but I think that the real problem is with the way that the Government expects private companies to bid for contracts where they might have to pay huge sums that relate to historic liabilities.

Stagecoach seem to have taken a decision that the decreasing profits from Rail and the uncertainties mean that the scope to be hit with open ended pension funding means it’s no longer worth the candle.

I’m certainly not defending any “excessive” profits made by TOCs in the earlier years of privatisation but… be careful what you wish for… we are now in an environment where the Government can no longer attract significant competition for new franchises, where the pendulum is swinging away from innovation and towards baseline bids from the small number of companies still bidding.

I don’t think that nationalisation will fix things; I don’t think that the DfT and Network Rail are shining lights so I don’t trust the idea that More Government will solve everything. I’m not suggesting free-for-all privatisation either. I just think that we’d be better with a managed system where there’s room for large transport companies like National Express/ Stagecoach and room for innovative new entrants to the market to partner them – if we are going to have a private railway then the fact that some of the biggest players no longer think it’s worth participating should concern people.

Hate Branson all you want but he was one of the few people evangelical about rail – I’d rather have the positivity of Virgin’s “awesome” adverts than most of the underwhelming TOCs who don’t seem interested in attracting new business. The future railway seems to be dominated by lots of grey trains and also a handful of “grey” companies (mainly arms of overseas governments). Hard to get excited about. The question is, what will we do when foreign governments decide they are no longer interested?

 

[Robertj21a]

I fail to see how any sensible company would want to comply with the terms of this franchise. Stagecoach certainly doesn't want an open cheque hanging around their neck. It still seems strange that they bid at all - and a shame that some others did bid. It should have been ignored until more certainty was included in it.