Transport group claims rail franchising regime is in crisis as High Court trial gets under way probing government’s decision to disqualify group from bids

Virgin and SNCF have joined Stagecoach in its action

Lawyers for Stagecoach blasted the Railway Pensions Scheme as a “basket case” and claimed rail franchising was in crisis in the first day of a legal challenge in the High Court.

The Perth-based group is suing the government after being disqualified last year from bidding for three franchises – the East Midlands and West Coast Partnership competitions as well as the now abandoned contest for the South Eastern franchise. It has been joined by Virgin and SNCF, the group’s partners in a bid for the West Coast Partnership rail franchise that was ultimately won by a consortium of FirstGroup and Trenitalia.

It was anticipated that Arriva would bring a separate claim, rumoured to be for around £200m, on similar grounds for the East Midlands competition, but told the court that it had dropped its legal action after agreeing an out of court settlement.

The case centres on the disqualification from bidding after Stagecoach and its partners refused to take on what the group termed “unknowable risk” in pensions liabilities.

The Pensions Regulator had indicated that companies providing rail services, rather than the government, would be ultimately responsible for taking on the risk for a funding shortfall that the Railway Pensions Scheme estimated at £7.5bn.

Jason Coppel QC, acting for the joint venture, said the bidders were expected to take on “disproportionate” risks within their bids. He added that it was not within the public domain how the successful bidders for franchises would seek to manage and pay for the additional liability.

Coppel claimed the Treasury had initially refused to agree to a Department for Transport proposal that the government share the cost of multiple future pension scheme re-evaluations.

He cited remarks by an anonymous DfT official that the government had received “non-compliant bids which were believable and compliant bids which were unbelievable”.

The Treasury subsequently agreed to share the risk of more potential pension deficit increases, said Coppel, but officials from the DfT chose not tell then transport secretary Chris Grayling of the plan, a move that could have avoided the potentially costly legal action.

He also claimed the DfT had required bidders to assume disproportionate risk and had also accepted bids that were over-optimistic and should not have been accepted.

Coppel added that the DfT had conducted the rail franchise procurement processes “as if they were immune from the normal standards of transparency”.

He claimed that the Railway Pensions Scheme was a “basket case” requiring extra funding ranging from “bad to off the scale”. He also criticised the DfT for the amount of trial evidence that it had declared to be commercially confidential. He alleged that much of this material was “embarrassing” to the government rather than commercially confidential.

Stagecoach said it would not comment on the case beyond noting that it believed in a rail system which is “focused on delivering the best services for customers, is financially sustainable and has the confidence of the public”.

It is disappointing that we have had to resort to legal action, however we believe there are important issues to be determined by the court and we have a strong case

The spokesperson continued: “It is disappointing that we have had to resort to legal action, however we believe there are important issues to be determined by the court and we have a strong case.”

The DfT says it will not comment on the case.

Pension scheme at heart of dispute

The Railways Pensions Scheme (RPS) is at the heart of the dispute between Stagecoach, its partners and the Department for Transport. It is a final salary defined benefit scheme that replaced the old British Rail Pension Scheme following privatisation in 1994.

The RPS is one of the UK’s largest pension schemes and serves 340,000 retired and active staff but the scheme is running a deficit of £7.5bn, according to the Pension Regulator.

This is a significant deterioration for the scheme, which had a deficit of £400m in 2004. Network Rail had tried to introduce a defined contribution scheme for its staff in 2003, but this was subsequently scrapped.

Responsibility for the scheme is historically passed between companies taking on rail franchises. However, last year the Pension Regulator said the government was not the final guarantor of the scheme, meaning employers are responsible for making good funding shortfalls.

Last April the Rail Delivery Group said the Pension Regulator had demanded “immediate and significant contributions worth £2.6bn or more” from employers.

This article appears in the latest issue of Passenger Transport

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