Multi-Million Pension Safety Net for UK Bank HBOS

Rescued bank HBOS makes innovative back-up plan for deficit reduction and investment returns.

(June 27, 2013) — One of the UK’s largest high street banks has put in place a safety net worth almost £2 billion to protect a subsidiary’s pension fund should its deficit increase.

The HBOS Final Salary Pension Fund told members it had secured a sum from parent company Lloyds Banking Group worth almost double the £965 million deficit reported in its 2011 valuation.

In addition, from 2020 Lloyds will make additional contributions to close the funding gap, with a view to reaching fully-funded status in 2027.

“This means that the scheme is not dependent on Lloyds continuing to make cash contributions over an extended recovery plan period,” Chairman Harry Baines wrote in a letter to members last month. “The asset pool will remain in place after the deficit repair contributions start in 2020 (although the size of the pool will be reduced as contributions are made).”

The move means benefits will be supported by the assets in the pension fund-which totalled £7.9 billion at the end of June 2011-and the newly-created pool. It also avoids the bank paying in superfluous contributions and risking the fund being in surplus, which would leave the financial institution with no way to take back the excess cash.

It is understood that the pool contains highly rated, good quality assets rather than just cash.

The pension fund itself has weathered the recent financial storm in relative good health. The letter to members showed its assets had grown by 17.8% from the end of December 2008 to the end of June 2011, which was equivalent to a £1.2 billion increase.

On the other side of the equation, liabilities to the fund rose 12.7% over the same period, which marked a £1 billion increase, but overall the deficit was reduced by £182 million.

HBOS was saved from collapse in 2008 by Lloyds TSB, which was encouraged by the UK government to take on the failing institution. The deal completed in January 2009.

In April, former HBOS CEO, James Crosby, offered to give up his knighthood-which was finally stripped this month-and took a 30% cut to his generous pension allowance following the publication of a scathing report into the bank’s collapse.

The bank’s move is the latest from an employer looking for innovative solutions to pension problems. This year, food producer Dairy Crest announced it would put maturing cheese inventories, with a maximum realisable value of £60 million, at the disposal of its pension fund to meet liabilities.

Lloyds Banking Group had not returned requests for comment by the time of going to press.

Related content: aiCIO Forty Under Forty, Larissa Benbow, Head of Investments, HBOS Final Salary Pension Scheme