Banking StandardsWritten evidence from RBS Pension Trustee
Draft Banking Reform Bill—Policy document. Response to Question 32 “What other matters should the Commission take into account?”
The Fund has 223,000 members of whom 55,000 are pensioners 121,000 are deferred members and 47,000 are active members. Membership of the Defined Benefit schemes run by the four biggest UK banks total 787,000.
The Royal Bank of Scotland Group, together with some other banks, has a consolidated, group-wide scheme which comprise members of both the proposed ring-fenced and non ring-fenced operations. In this situation, the implications of achieving separation will be complex and significant.
(1) Separation of pension schemes
We recognise the importance of dividing the pension scheme liabilities between the ring-fenced and non ring-fenced operations to avoid one part being liable for the pension debts of the other part. Sectionalisation within the existing pension scheme (as distinct from creating two separate and discrete pension schemes) would achieve the aim of avoiding joint and several liability. Employees of the ring-fenced bank would comprise the membership of one section and the employees of the non ring-fenced bank would comprise another.
However it must be recognised that ring-fencing will could lead to individually weaker businesses (and respective employer covenants to support the pension liabilities). This consideration together with the preference afforded to depositors (which has the effect of relegating the claims of pension schemes) will require trustees (in respect of each section of the pension liabilities) to consider, in accordance with guidance from the Pensions Regulator, whether to adopt more prudent actuarial assumptions and/or a more conservative investment policy. Both of these factors will increase deficits and leave trustees to require larger contributions and, possibly, security for the deficit (the “Prudence Scenario”). This will impact the separate businesses adversely who are already trying to balance the requirements of increased capital reserves and the demands of shareholders and the wider capital markets.
We would therefore suggest that sectionalisation is a permitted option as well as full separation. However the impact of separation of the businesses upon the pension liabilities, which will lead to weaker employer covenants, should be borne in mind in structuring more detailed aspects of the secondary legislation.
(2) Apportionment of liabilities
Pension scheme members of both the ring fenced and non-ring fenced bank should be treated fairly. There is a risk that the apportionment all the historical pension liabilities of the employees of one business to the pension section attaching to that business will not be equitable, particularly if the covenant of the employer, say the non ring-fenced bank, supporting that section is weaker that the covenant of the other scheme.
A solution might be to apportion the liabilities across both sections, so that members receive pension payments from each of the new sections. Individual members will then have exposure to the covenants of both the ring-fenced and wider banking groups both before and after the separation. As well as being equitable between different groups of members, this approach removes the practical issues around availability of data and the need to make subjective judgements about where members should be allocated which will arise if each member is allocated to one scheme or other
The division of pension liabilities, despite its complexity, should be carried out by the trustees of the scheme rather than the employers. Trustees owe a fiduciary duty to their members to act in their collective best interests and will strive to achieve a balanced approach in the long term interests of members. To leave this decision to the employers runs the risk of the employers making decisions based upon business considerations rather than the interests of employees.
In addition, legislation should contain provisions to protect trustees from subsequent legal liability for any decision made in dividing or apportioning the pension liabilities between schemes or sections.
(3) Timing of Separation
Division of the Bank’s business and the apportionment of the liabilities of the pension scheme should be seen as elements of the same decision. Whether actual separation of the pension scheme assets and liabilities could be deferred to a later date is a different issue so long as the basis of apportionment is agreed at the time of the division of the business.
We would prefer a situation where the trustees have the power to determine the timing of the apportionment of pension liabilities. Such timing could be made the subject of consultation with the sponsoring bank (and the approval of the Pensions Regulator).
30 October 2012