Bloomberg News

British Banks’ Pension Funds Boosted Allocation to Cash in 2011

June 22, 2012

Three of the U.K.’s four largest banks put more of their pension fund assets into cash than any of the other twenty companies with the largest pension funds last year, according to a survey by the Bloomberg Risk newsletter.

Lloyds Banking Group Plc (LLOY), Royal Bank of Scotland Plc and Barclays Plc (BARC)’s pension funds increased their cash holdings to a combined 11 billion pounds ($17 billion) at the end of 2011 from 6.6 billion pounds in 2010, according to a Bloomberg Brief survey of the pension liabilities in the Stoxx 600 index. The three U.K. banks manage the largest pension liabilities among financial companies included in the index.

The U.K. Financial Services Authority, which is implementing the latest rules set by the Basel Committee on Banking Supervision, said in February last year it expected banks to take pension risks into account in their capital calculations. The cut in equities, which may have implemented to reduce investment risk, could also have helped the funds in the second quarter of 2012 when equity markets in Europe tumbled.

“Banks, looking at what the effect of Basel is likely to be, may look at their own pension schemes and try and increase stability by encouraging trustees to invest more conservatively,” Deborah Cooper, a London-based pension consultant at Mercer, said in an interview. “As a pure investment decision, many would be looking to do so anyway given the market environment.”

Barclays, RBS

Barclays increased cash as a percentage of total assets by almost eight percentage points to 14 percent between the end of 2010 and Dec. 31, 2011, according to its annual report. London- based Lloyds boosted its cash holdings to 17 percent from 13 percent of total assets, while RBS climbed to 14 percent from 8.1 percent, according to their annual reports.

Barclays and RBS both completed triennial valuations that increased required cash contributions to fill funding gaps, their reports showed. Barclays said in its report some of the cash would be re-invested “shortly” after the end of 2011. Officials at Barclays, RBS and Lloyds declined to comment on their pension fund’s cash positions beyond the filings.

HSBC Holdings Plc (HSBA), Europe’s biggest bank, cut its cash holdings by three percentage points to five percent of total assets, after making a decision in 2006 to reduce investment risk and increase its bond holdings over time.

Barclays reduced its forecast return by 130 basis points to 5 percent at the end of 2011. RBS reduced its return assumption by 70 basis points to 5.6 percent over the period, compared with the average 5.5 percent applied by the companies with the largest pension obligations in the survey.

Discount Rates

Declining discount rates and investment returns have prompted companies managing the largest deficits to continue to invest in equities, betting they will boost returns and allow them to plug their deficits.

The company with the largest allocation to equities in the survey was BP Plc (BP/), which invested 68 percent of its pension plan in equities. Even after a ten percentage-point decline in its share devoted to equities, BAE Systems Plc (BA/) invested more than half of its pension plan in stocks at the end of last year.

David Nicholas, a spokesman at BP declined to comment on the oil producer’s equity allocation. Leonie Foster, a spokeswoman at BAE, said part of the decline was part of a ``de-risking'' program.

The largest decline of allocation to equities was a 19 percentage point reduction by Fiat SpA (F) to 25 percent. The Italian auto maker’s holdings of so-called alternative assets such as private equity and hedge funds increased after it took control of U.S. carmaker Chrysler Group LLC during its 2009 bankruptcy.

To contact the reporters on this story: Radi Khasawneh in London at rkhasawneh@bloomberg.net Albert Fuertes in London at afuertes@bloomberg.net

To contact the editor responsible for this story: Nicholas Dunbar at ndunbar1@bloomberg.net


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