A report in the Financial Times, a few days ago, indicated that a number of Britain’s biggest banks have found a novel way of reducing their pension fund deficits by transferring hard-to-sell assets into their employee pension funds, usually in lieu of one-off lump sum payments.
It is easy to see the advantages of doing this for the banks – not only are they getting illiquid assets off their balance sheets, but they are, in theory at least, also reducing the need to make transfers of hard cash into employee pension funds whilst, at the same time, further improving their balance sheets (because pension fund deficits now have to appear on them as a company liability). They will also get various capital and tax reliefs on the transaction, particularly if the investments have been given a “haircut” (i.e. they have been transferred over with a deliberately reduced valuation, in order to give the Pension Trustees some comfort over accepting hard-to-sell assets instead of cash).
The claim is that this is a win-win situation: both banks and pension scheme members benefit, and no-one loses. I am pretty much an innocent in financial matters, but experience and a certain natural cynicism make me wonder whether this is really as wonderful a deal as it’s being portrayed. Pension funds work on the basis of long-term growth rather than short term profit-taking, runs the argument, so that by the time the money is needed, the assets will have regained their value and can be sold. This will be all well and good if it works but, if it doesn’t, it may leave some pension funds in even worse shape than they are now. The Financial Markets have dipped significantly since these transactions took place, and even “haircuts” may still have left the pension funds in question with increased deficits. Also – and only half-jokingly – can you really trust any idea dreamed up by the institutions that bought us bundles of toxic debt?
Nonetheless, anybody at the banks in question with a bonus target related to the efficient disposal of illiquid assets is no doubt lifting the phone to ring the local Ferrari Dealer, even as we speak. It’s an ill wind……