Europe News

UK Banks Shift Hard-to-Sell Assets Into Pension Funds

Patrick Jenkins, Financial Times

Some of Britain’s biggest banks have begun quietly ridding themselves of billions of pounds of assets they have found difficult to sell following the financial crisis, moving them off their balance sheets and into staff pension funds.

The Royal Bank of Scotland Headquarters
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The moves — designed with the dual purpose of clearing unwanted assets from the banks’ own books while at the same time closing pension fund deficits — have been made as exceptional top-up payments into the pension schemes over recent months.

HSBC made a 1.76 billion pounds exceptional payment into its pension scheme, comprising a portfolio of assets ranging from subordinated debt to asset-backed securities, last December.

Lloyds also made a 1 billion pound commitment to its pension fund as part of a five billion pounds transfer of assets into an intermediary funding vehicle. Lloyds did not respond to requests for information about the arrangement, but pensions experts said the measures were comparable with the HSBC plan.

Both moves were revealed in annual reports, although few details were disclosed. Royal Bank of Scotland is believed to have considered a similar transaction, though this month it decided for the time being to use only cash to address its pension fund deficit.

Like many companies, all the big UK banks are currently running deficits, with insufficient assets to cover projected liabilities.

Nobby Clark, who runs HSBC’s pensions solutions group, said the transfer of illiquid assets into pension schemes was a sensible way for banks to deal with funding deficits.

“The pension scheme has the ability to take liquidity risk with assets that aren’t liquid temporarily,” Mr Clark said. Pension funds’ liabilities are long-term, so short-term illiquidity is unimportant.

Many big banks found themselves with vast portfolios of illiquid assets, such as asset-backed securities tied to the US mortgage market, following the 2008 financial crisis. Not only must banks mark the value of the assets, held in their trading books, to still-low market rates, but the majority also attract higher capital requirements under new regulations. The rules do not apply to assets in pension funds, however.

Banks gain from capital and tax relief on the transfer transactions, while the pension fund typically secures contributions much sooner than if it were to wait for cash payments.

Some pension fund trustees have expressed concern that they are receiving questionable assets in place of cash. “[Trustees] might say: ‘If I can have a crisp new white shirt why would I want one you wore yesterday?’” said Dawid Konotey-Ahulu, co-chief executive of consultancy Redington.

But bank executives point out that transfers into bank pension funds have occurred at impaired book values. In addition, some assets have been given another valuation “haircut” of as much as 20 percent, according to pensions experts – sufficient to placate pension fund trustees.

The trend is a version of a pension funding strategy popularized by retailers in recent years, based on property transfers.

The news comes as HM Revenue and Customs prepares to close a loophole in tax relief rules governing asset-based pension fund transfers.

Last week HMRC concluded consultation on a plan to clamp down on what it said was a ruse by some companies to claim double corporate tax relief on pension contributions, by routing assets into an intermediate vehicle first, before income is then paid on annually in a series of secondary transactions into the pension fund.

Pensions experts say as many as 20 companies may have adopted the structures, with Lloyds being the biggest, though it is unclear how many are “double-dipping” on tax relief.

John Ralfe, an independent pensions expert, believes Lloyds may lose out on as much as 155 million pounds of anticipated relief on its 1 billion pounds planned contribution when the loophole is closed. “The real issue,” Mr Ralfe said, “is why it has taken HMRC since 2007, when the first transaction was completed, to take the first step to plug this loophole.”