Rail industry chiefs and trade union leaders have been shaken by the latest forecasts for life expectancy and the impact on the future cost of providing pensions.

Concerns are growing as the Railway Pensions Commission prepares to issue its final report.

A senior manager close to the Railway Pensions Commission told Railnews: “The situation we find ourselves in is just like global warming. If we don’t do something now, we will never get another chance.

“In terms of financing pensions, people in future will have to either work longer and retire later or contribute much higher amounts from their pay to finance their pensions in old age.”

While many people have felt that recent improvements in the Stock Market would help overcome any pension scheme deficits, it is the disclosure that people are now expected to live so much longer that is causing the greatest concern.

“We are faced with the possibility of having to pay pensions to people for almost as long as they actually are employed in the industry. It is incredible how much life expectancy has increased in only a decade,” said one of the industry’s senior human resources directors.

When railway privatisation was completed in 1998, a young man joining the industry aged 20 could expect to live until he was 74 years old, according to actuaries, and a young woman starting her career at the same age could expect to live until 80.

Now, just 10 years later, according to figures for the third quarter of 2007, life expectancy has improved so much that – even on the most pessimistic actuarial estimate – a male aged 20 can expect to live until at least 88 and a female aged 20 last year can expect to live until 91.

Another, more optimistic estimate reckons today’s 20-year-old male can expect to live until he is 94, and a 20-year-old female will live until she is almost 99.

So, if a 20-year-old male joined the rail industry 10 years ago and worked until 60, his pension scheme would have expected to pay his pension for 14 years after his retirement. But now, if present pensions arrangements were to continue, the scheme will need sufficient funds to continue to pay today’s 20-year-old recruit for at least 28 years, and possibly 34 years, after his retirement.

In an interim report last year, the Railway Pensions Commission said the pension scheme had benefited higher earners at the expense of moderately paid staff, and should be replaced with a “more equitable” arrangement.

The Commission also rejected unions’ calls for the pension scheme to be split into three separate sections, saying that would not solve rising contribution costs. Instead, a new salary-related scheme should be set up that would be cheaper for employees and employers and fairer for lower paid staff.

It also called on Network Rail to review its policy of stopping new staff from joining its pension scheme for five years.

The Commission was set up by ATOC, Network Rail and the rail industry trade unions after the higher contributions needed to fund the Railway Pension Scheme (RPS) deficit led to threats of a national rail strike in 2006.

The Commission was asked to consider if any alternative means of long-term pension provision might be available that would be fair and affordable for both employees and employers.

The Commission is chaired by former Turner Pensions Commissioner Jeannie Drake, who is also a member of the Equality and Human Rights Commission.

She said: “The cost of pensions provision is rising and we need to find imaginative, affordable, equitable and sustainable solutions to maintaining long-term pension
provision.”

Ms Drake is supported by two other commissioners – Bryn Davies, an independent actuary, nominated by the trade unions (ASLEF, RMT, TSSA and the Confederation of Shipbuilding and Engineering Unions), and Peter Thompson, consulting actuary, nominated by the employers (including Network Rail and the train operating companies).

According to the accountancy firm Deloitte, in a report issued just before the New Year, final salary pension schemes run by FTSE 100 firms are now in surplus again, after surging in value by £55 billion last year.

But the Railway Pension Scheme – which has more than 89,000 members in over 100 different sections – is still awaiting its triennial valuation by actuaries, due in February.

In 1993, the Railway Pension Scheme had a surplus of £1.8 billion but that figure had turned into a £400 million deficit by the end of 2004.

This was due to lower than expected investment returns, rising life expectancy and improvements in employment benefits.

In its interim report, the Commission said: “Each of [these] three factors – benefit improvements, life expectancy and rates of return – taken separately would have been a problem.

“Together, they constituted a ‘perfect storm’, in terms of funding the final salary pension promise that has had to be addressed, either through increased contributions or the adjustment of pension benefits, or both.

“Many final salary schemes were closed to new entrants as a result of these factors. At the same time, their impact was thrown into prominence by changes in accountancy standards that gave much greater visibility to pension fund deficits as they appeared on corporate balance sheets.

“The inevitable impact on the pockets of both employees and employers has created the situation that the Commission has been asked to address.”

The Commission’s final report and recommendations are expected to be published later this month.