Peter Murray of RPS talks to Fennell Betson
To outsiders the privatisation of the UK railway system may seem to be a reversion to a Victorian-era model. Instead of a monolithic state body, around 100 different companies and units now make up the British rail industry.
Change has been no less momentous in the pensions fund side, which has mirrored the move from being a single employer arrangement to becoming effectively an industry-wide scheme. Peter Murray, who is chief executive of the Railway Pensions Scheme (RPS) trustee board says: “After privatisation in 1994, the railways split up into all these companies, concerned with everything, for example, from running services, maintenance, providing finance for rolling stock, catering and ticketing.”
The government at the time paid close attention to preserving the pensions rights of railway employees. “Those who retired from the railways before privatisation, went into a separate section, and each employer who employs a ‘pre-privatised’ railway employee is required to set up a separate section in the pension scheme,” he explains. These employees have been given a promise from the government that that they will receive pension benefits no less favourable than from the pre-privatised scheme.
Another thing the government provided, because the railways were breaking up into these independent units was that each employer’s section would be actuarially independent. “To a considerable degree, the RPS has the characteristics of 100 separate schemes.”
Murray adds: “Currently, it is very like a Dutch industry-wide scheme, but with the fundamental difference that employers have the freedom not to use us if they do not want to.”
For new employees, joining railway companies, there are now two types of arrangements, he points out. In the case of train operating companies, who are the franchisors, the employers can set up whatever pension arrangements they like but they have to be carried out through RPS, unless they get special permission. This is because the railway franchising authority does not want to be left with a pension problem on its hands when franchises come to an end. A number of train operators have set up DC schemes through us.”
But the other employers are free to set up whatever pension schemes they want for new employees. “In fact, employers representing 15% of employees have decided to opt out for new employees.”
Murray accepts that it is sensible, say, for a company that buys into a railway company to put its new employees into its existing scheme. “We expected to lose our monopoly of all employers in the industry and we accept this.”
The total membership of the scheme is 330,000, of which 170,000 are pensioners and 7000 are deferred pensioners. About 90,000 members are working currently in the industry and they are spread among the 100 different pension sections, and RPS trustee company acts for around 80 of these. The other 20 or so have set up their own pensions committee, with a 50/50 employer-employee representation, to which a substantial range of trustee powers have been delegated. These are a good development in Murray’s view. In addition, the RPS trustee company acts for 12 other schemes including that for the rail transport police.
“This means that we have all these sections, with potentially over 100 separate asset allocations, plus the independent schemes,” he says. They can vary dramatically in size from sections with thousands of members to one which comprises a pensioner aged 93! (Only the English).
“The question is how can you enable these schemes to have the asset allocation they want, to have the continued economies of scale and investment that they enjoyed in the past?” Murray has no hesitation in declaring that in RPS they have devised the solution by setting up a series of pooled investment funds to handle RPS’ £14bn (E21bn) of assets. “We believe this structure provides econ-omies of scale and access to a quality of manager that the small and medium-sized employers would not otherwise be able to reach.” There are eight main pooled funds of which the largest by far is the global equity fund, which includes UK equities.
Since the asset allocation is decided at section level and depends on each one’s financial position, the pooled structure enables them to buy the appropriate number of units in the different to match their requirements. “Our pooled structure enables us to have a different allocation for each section. So the scheme with the 93-year-old pensioner is largely in cash.” But as most of the sections, have similar characteristics actuarially, they do have similar allocations. While the trustees provide actuarial and investment advice, the employers are free to go and get their own advice independently. The allocation is reviewed on an annual basis, with a strategic review for each section following its three-year valuation. While there is no formal tactical asset allocation process, sections can change their position by selling and buying units in the different funds.
RPS set up its own exempt authorised unit trusts, but then hands out the money on a segregated basis to different fund managers. “Our global equity fund has a specific bench mark and we have six major investment managers, among whom the assets are divided equally. As we are the largest single customer for some managers, we get the best managers in the organisation. This is more important with some than others. Some teams have small variations, while others are wider, so it is essential to get the best there is.
The Global Equity Pooled fund is managed by Capital International, Fidelity, Fleming, Mercury, Morgan Grenfell and Schroders. Mercury also runs the Short Bond Fund manager and shares the Index Linked Bond fund with Phillips & Drew.
“With our international bond fund, we use medium term bonds to match our medium term liabilities, so we use the Salomon World Bond Index, 50% hedged back into sterling and we give £400m each to Credit Suisse, Mercury, and Francis Fisher Trees & Watts.”
The Direct Investment fund, which is run by venture specialists CinVen, investing in buy-outs and venture capital has its own approach, since, though this fund is unitised, the rules are a bit different. Murray explains: “You cannot go in and out of it. So we go to each section annually and ask how much they want to put into this area that year, and this is made available to CinVen.” Each year is accounted for separately, and as the investment cannot be sold, the returns only come when the investments are realised.
The investment side is handled by RailPen Investments, a subsidiary of the trustee company, which monitors how the managers are performing and will recommend termination and advise on new appointments. But the track record has been very good, he says. “Where we use peer group benchmarks, our track record is outperformance.” Generally the same holds good for index benchmarks. “Manager turnover is low. In 1997, we terminated PDFM for global equities and brought in Capital, Fidelity and Schroders.”
Having an in-house investment department, even though it does not involve any direct investment, means that managers are scrutinised in much more depth than they would be in the normal pension fund, he says.
As to the actual range of funds, this is reviewed as part of the asset allocation process. This should reveal whether the present range of funds and their benchmarks allow the sections to invest as they want. “So if we had a number of requests for a change in direction, we could be recommending another pooled fund or whatever else is needed.”
But, in the last five years, it has been more a question of closing things down. “We have been pulling out of overseas property, as the sections do not want to invest here.” The famous Works of Art fund started in the 1970s as an inflation hedge, which at one time held over 2,000 works, is now down to less than 20. These are being sold off as the opportunity arises. Overall is provided a return of over 4% above inflation its 25 year history. “These decisions are driven from the ground up.”
A feature of the RPS is that it is on a shared cost basis, with employers and employees of each section splitting the contribution on a 60/40 basis, but without any cross-subsidisation between the sectors. “This means the employer is not entitled to all the surplus and employees have stronger rights to this than in the normal scheme. Since employees are taking risks, we have to be more cautious and more careful about our funding levels and investment strategy that we would be if the employer was bearing all the risk.” The typical funding rate for the 60ths defined benefit scheme, with a 40ths lump sum, is 5% for the employee and 7.5% for the employer.
Each section has to be actuarially valued and each section’s contribution rate is calculated following this. “A minimum funding requirement (MFR) valuation is also carried out on a sectional basis. At present the vast majority are well funded and we do not anticipate problems in the medium term for most of our sections.”
Here Murray slips into his National Association of Pension Funds’s role, as he has just spent the past two years as its national chairman. “Over time MFR will constrain our investment policy and put up costs to employers and employees. Like most pension funds we are anticipating that the government will either move away from MFR or change it, as it is a rather badly designed structure.”
He sees slower growth in the formation of separate sections, but he expects the benefits structures to diverge more as employers change their policies. The investment range will also evolve over time. “I have no grand vision, as we are just responding to the needs of customers.
“Our role is to continue to provide cost effective, high quality pension benefit schemes to railway employers and employees in a situation where the industry is fragmenting and changing. Our challenge is how to manage the increasing diversity and fragmentation in pension arrangements without losing efficiency and quality.”
For the past two years these challenges have been combined with his NAPF role, which he has obviously relished, as his term of office coincided with the arrival of the New Labour government. “These two years have been spent in getting to know the government and responding to their steady stream of initiatives, some positive and some not so positive.”
He has a clear vision of what the NAPF has to aim for in these circumstances: “We have to help to create an environment where employer sponsored pension schemes can flourish. As it is the government that primarily creates the playing field where more employers provide better pensions savings vehicles for employees, so that as society ages, those who retire have their retirement income backed by assets and are not a burden to society.”
Murray says two main threats to that provision are the gross over regulation emanating from the Department of Social Security (DSS) and the Inland Revenue. He argues that most of their regulations are superfluous and generally do not protect “the Exchequer against anything”. Most of it has just grown up over the years and is no longer relevant and needs to be removed. “The move from DB to DC, which is almost invariably accompanied by lower employer contributions and therefore lower emerging benefits, has been driven largely, but not exclusively, by the fact that it is very burdensome for a medium or small-sized employer to run a scheme.” The government is now listening to this message, he claims. “The government recognises that occupational schemes are the greatest welfare success story in this country. It wants them to grow and prosper. So we are saying that if they want this to happen, they must make it easier not harder for employer to run these.”
Taxation is the second threat, with substantial damage done by the government’s removal of Advance Corporation Tax relief and the changes to the rebate structure. “These were substantial own goals by the government and will have discouraged some employers from providing schemes,” he argues. “Pensions are deferred pay and if the member is deferring pay for 40 years, the least the tax man can do is defer the tax until the member receives the pay that has been deferred.
“Every body accepts tax should be paid on pensions, but if they have to pay tax again before they receive the pension, we will see the position here in the UK as in New Zealand, whereby changing the tax regime, the government there has wiped out the occupational pensions sector.”
He reckons the government is listening now and responding to what pensions people are saying. “I am now more optimistic than I was two years ago and it is nice to be bowing out of the NAPF role on an optimistic note.”

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