August 22
Adding some balance to the Barclays debate

In The Times today, Patrick Hosking lambasts the deal that Barclays have done with its UK pension scheme and criticises the rest of the media for being silent on this issue, which was described at the end of last month in Barclays’ interim results.

It is easy to be critical of big banks, seen by many as the cause of the financial crisis from which the UK is arguably still recovering and in the wake of the many scandals that have rocked the industry, including Libor rigging and foreign exchange manipulation.  However, we actually see the agreement reached between Barclays and its UK pension scheme as part of its formal triennial actuarial valuation as being a positive step which could considerably boost the security of the pensions of the bank’s past and current employees.

Whilst the cash contributions payable by Barclays to plug the deficit over the next four years have indeed been cut, overall, Barclays have committed to making contributions towards the deficit totalling £8.2 billion, which is an extra £4.5 billion compared to what was agreed at the previous valuation in 2013.

We note that the sponsoring employer to the scheme has changed because of rules enforced upon Barclays requiring them to ring-fence the consumer and business banking operations from the rest of the business.  Transitional arrangements apply until 2025 and dividends payable by the ring-fenced bank can also be used to pay the agreed deficit contributions if the sponsoring employer fails to pay.

In addition, Barclays have pledged security over up to £9 billion of assets consisting of government securities, high quality securitisations of credit cards, mortgages and corporate loans.  The scheme can call upon this collateral pool in the event that the sponsoring employer does not pay the agreed deficit contributions or in the event of the sponsoring employer’s insolvency.  This new security arrangement could be hugely valuable to members of the scheme, significantly boosting the amount of pension they would receive in the event of employer insolvency.  Indeed, contingent security can be much more effective than cash contributions at addressing the real risks faced by pension scheme members, as we concluded in our research into the “risk of ruin”.

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