Banks ring-fence plans that are likely to cause material detriment to their defined benefit (DB) pension schemes will have to be cleared by The Pensions Regulator (TPR), the watchdog has warned.
According to new regulations brought in to strengthen the financial system following the financial crisis, banks will need to ring-fence their retail business, separating it from more riskier activities, such as investment banking.
UK banks with core deposits of more than £25bn have until 2019 to ring fence their retail and investment arms and until 2026 to ensure their pension schemes are placed in one of these divisions.
According to the pensions watchdog, most banks are planning to place their pensions in a division by 2019.
A spokesman for The Pensions Regulator said the watchdog is in discussions with five banks (Barclays, HSBC, Lloyds, RBS and Santander) that have defined benefit pension schemes.
If a bank's plans to meet this new legislation are likely to cause material detriment to their scheme, the regulator's spokesman stated they have to come to the watchdog for clearance.
From the five banks, only two – Barclays and RBS - will have part or the totality of their schemes in the investment arm of the business, which has been raising questions about the level of protections of the scheme members.
Barclays will satisfy the new legislation requirement by setting up a new ring-fenced bank, subject to approval, in April 2018.
However, Barclays Bank UK Retirement Fund (UKRF), the banking giant's final salary scheme, will be moved to the investment bank after 2025.
I am struggling to fathom how being shackled to the expendable half provides long term reassurance to the pension scheme members.Frank FieldDue to concerns about the future of pension fund members pensions, Frank Field, chairman of the Work & Pensions select committee, has written to The Pensions Regulator and the scheme trustees.
He said: "The whole point of splitting banks in two is to protect the safe retail bank that can't be allowed to fail from the casino bank that can go bust come the next crash.
"I am struggling to fathom how being shackled to the expendable half provides long term reassurance to the pension scheme members."
With liabilities of £42.5bn and assets of £34.6bn, the scheme has a deficit of £7.9bn, according to its triennial actuarial valuation conducted in September 2016.
A spokesperson at the bank said: "Barclays' primary objective in its ring-fencing plans has been to safe-guard the interests of our pensioners.
"We believe that we have achieved this through the agreement reached with the trustee and their advisers, which involve both of Barclays’ operating companies being liable for the pension fund until December 2025, and up to £9bn of assets being committed to fully secure its obligations."
The RBS Group Pension fund – a defined benefit scheme with more than 213,000 members – has two sections, which will be split between the retail and investment business of the bank.
The AA Section, which is the legacy ABN Amro UK pension scheme, an investment bank, will be outside the ring-fence.
The majority of defined benefit members, belonging to the main section, will be in the retail arm.
An RBS spokesman said: "In order to comply with ring-fencing rules, a small number of employees who will be employed by the non-ring-fenced bank will need to move to this pension scheme.
"This will ensure compliance with ring-fencing rules and that their pensions are unchanged."
FTAdviser understands that this will affect around 300 employees.
The Pensions Regulator's spokesperson said: "We are aware of RBS' plans and continue to discuss these with RBS and the scheme's trustees.
"However we will not be commenting further on this particular case unless it becomes appropriate to do so."
Tom Selby, senior analyst at AJ Bell, argued the forced separation of the retail and investment banking operations of major banks raises questions over where responsibility for paying pensions to defined benefit scheme members should ultimately rest.
He said: "However, from a member’s point of view there should be little difference.
"It is worth noting that significant reforms have been put in place since the financial crisis and banks are required to hold huge sums of cash in reserve to protect them from a potential market shock.
"Furthermore, the trustees are there to protect members' interests, while the Pension Protection Fund remains a hugely valuable buffer of last resort in the event of a catastrophe befalling a company."
maria.espadinha@ft.com
