HSBC and Lloyds Banking Group tackle pension deficits with transfer of hard-to-sell assets

HSBC and Lloyds Banking Group are transferring hard-to-sell assets into their pension schemes in order to help reduce growing fund deficits.

HSBC made a payment of £1.76 billion into its pension scheme in December 2010. The sum was made up of illiquid assets ranging from subordinated debt to asset back securities.

Lloyds Banking Group, which has pension liabilities of £27 billion, made a £1 billion payment into its pension fund this year.

John O’Brien, senior consultant in Mercer’s financial strategy group, said that, since the financial crash in 2008, many large banks have considered this option, which creates a win-win deal for the bank and the trustees.

With some banks now facing a higher pension liability than their market capital value, the move allows illiquid assets to be removed from the banks’ balance sheet.

O’Brien said: “A lot of value of banks’ assets will be depressed and therefore hard to sell in the current market.†

“One opportunity is to transfer these illiquid assets into the company pension fund, probably at book values or market price.

“There have been quite a lot of discussions at other banks around this, but only two have gone through with it.

A spokesperson from Lloyds Banking Group said it was taking a prudent approach to the long-term stability of its pension schemes.

“Any changes to the funding of these schemes have to be approved by independent trustees who have a legal obligation to look after the interests of the pension fund. Members’ needs continue to be our top priority.”

The real benefit is around capital tax relief, said O’Brien. He added: “When banks hold assets, they attract a lot of regulatory capital requirements.

“If they are transferred into a pension scheme, the assets no longer have regulatory requirements as they are considered to be separate from the bank itself.”

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