A Virgin trainImage copyright Reuters

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, which is majority-owned by Stagecoach, 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.

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