Actuarial Deficits and “turbo-charged pro-cyclicality”

Neil Copeland

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I misread the headline on and initially thought that Basil Fawlty was causing problems for UK banks and their pension schemes. Something to do with Europe, apparently. Was the manager from Barcelona, perhaps, or had Basil upset the Germans again by mentioning the war?

But no, it was the Basel Commission on Banking Supervision. The BCBS. Typical of the Swiss to come up with an acronym that doesn’t sound the slightest bit rude.

Anyway, the BCBS has published proposals for the treatment of defined benefit pension schemes which, UK bankers say, would unfairly penalise their capital positions. One proposal put forward means that banks would have to deduct their entire pension deficit from their core tier one capital, rather than the next five years’ contributions as is the case now. This, the bankers contend, could constrain dividend payments and lending.

One banker is quoted as describing the proposal thus “It is turbo-charged pro-cyclicality”. I have no idea what that means, and I’m not sure the banker does either, but, as we’ve seen with credit default swaps, lack of knowledge and understanding is not seen as a barrier in the banking world.

Whilst it’s difficult, in the current climate, to feel empathy with those responsible for bringing the world financial system to the brink of collapse, the pain will not be spread evenly and the measure will have a disproportionate impact on UK based banks. According to the article, most US banks do not provide defined benefit pension schemes and most continental European banks have not historically run pension deficits.

This proposal therefore means that the UK banks final salary pension schemes have the potential to impact on the wider UK economy and individual borrowers and savers. A further competitive disadvantage for UK plc as it struggles to emerge from recession.

This again highlights the many, and occasionally unexpected, risks faced by businesses operating this type of scheme. It also highlights the risk posed by the mooted EU wide regulatory body  and the difficulties it will face in squaring divergent national interests and economic characteristics.

So, that’s two egg mayonnaise, a prawn Goebbels, a Hermann Goering, and four Colditz salads.

Neil Copeland

Post by Neil Copeland

Director, pensions consultant and adviser to trustees and employers on all aspects of work based pension schemes.