Rail firms scoop pounds 500m windfall

Companies buying up British Rail are to share a pounds 500m "windfall", as a result of a huge surplus in the British Rail pension fund.

The revelation of the scale of the handout to the companies, which have successfully bid for sections of BR, was not known at the time of privatisation. Last night, it led to calls from MPs and rail campaigners for the surplus to be used to benefit employees and pensioners.

That is unlikely: instead, the new companies will declare a pensions "holiday" on their contributions, adding millions of pounds to their profits. But this in turn could provoke a court challenge by unions who think their members would be cheated.

The size of the surplus only came to light after an assessment of the value of the pounds 8bn pension fund by the Government Actuary's Department. The audit found that since the last assessment three years ago, the Railways Pension Scheme had a pounds 516m surplus thanks to a successful investment policy which in the past was based on world-class works of art.

Sir George Young, the Secretary of State for Transport, admitted to his Labour counterpart, Andrew Smith, that the issue of pension surpluses is "highly emotive". In a letter to Mr Smith, he said that it was normal business practice for firms to use surpluses to declare pension contribution holidays for themselves.

Mr Smith said: "I call on Sir George to give assurances that the pension surplus will be used to enhance benefits for existing staff and future pensioners, rather than line the pockets of the privatised companies."

Jonathan Bray, Co-ordinator of Save our Railways, the anti-rail privatisation campaign, said: "It is outrageous that the Government is prepared to allow pension fund surpluses to be raided in this way. These private companies have put nothing into the BR pension fund and they should get nothing from it."

The scheme is to be broken down into around 60 mini-funds for each of the companies which have started operating the now-privatised industry. Railtrack's share of the pensions bonanza will be more than pounds 50m.

While bidders for rail franchises had been told there might be a surplus, no accurate information was given and the size of the surplus now presents the new companies with an unexpected bonus. Last night, a spokesman for the Office of Passenger Rail Franchising which handled the bidding process said: "We could not give accurate figures because they were not available until the actuarial assessment had been carried out."

Documents provided to bidders stressed that any surpluses could be used for pension contribution holidays. In a letter leaked to The Independent, Sir George told the BR pensioners' federation: "The issue is simply about getting value for money for businesses, sales and franchises. The information did not imply that the trustees would approve a particular distribution of surplus."

The trustees of the pension fund are being lobbied fiercely by the trade unions representing rail employees not to allow the new companies merely to declare pension contribution holidays for themselves. All but one of the 30 new mini- funds set up by 1 April this year, when the actuary carried out the survey, is in surplus. Since then another 30 have been created and most are expected to be in surplus.

While the 300,000 rail pensioners are not in danger of losing any of their full entitlement, if companies declare pensions holidays, it will reduce the potential for extra benefits for existing employees in later years.

Under pension legislation, surpluses above 5 percent of the value of the scheme are liable to heavy rates of tax and therefore cannot be retained. Companies are allowed to use up to 60 per cent of this surplus for pension contribution holidays.