Bank of Ireland’s Latest Pension Deficit Reduction Plan Is Credit Positive
Last Wednesday, Bank of Ireland (Ba1 negative, D/ba2 negative)6
announced that it had reached an
agreement with its largest union on a shared solution to reduce its pension deficit of €1 billion. Two days
later, the bank’s largest union threw its support behind the plan, which, pending union and non-union
members’ approval, would reduce the pension deficit by approximately €400 million. This is credit positive
for the bank because it will improve its Basel III fully loaded core equity Tier 1 (CET1) ratio and positively
affect profits once the changes take effect.
The bank made significant changes to its pension scheme in 2010, reducing its deficit by €750 million
through benefit reductions. The bank also committed to make extra cash contributions of €750 million to
the scheme through 2015 to fully offset the remaining deficit. However, the pension gap widened in 2012
following a decrease in the discount rate.
The changes will benefit the bank because it will help offset the capital deduction for the pension deficit
under Basel III rules and increase the bank’s fully loaded CET1 ratio. We calculate the bank would record a
76-basis-point improvement in its CET1 ratio, based on Basel III risk-weighted assets reported at the end of
June. Bank of Ireland’s Basel III CET1 ratio was 8.6% at the end of June, including €1.8 billion of
preference shares that will no longer qualify as CET1 after 31 December 2017.
Reducing the deficit will also create a one-off pension credit of approximately €400 million, reducing the
bank’s operating expenses significantly and generating some cost savings in subsequent years.
The effect on Bank of Ireland’s core Tier 1 ratio under current rules will be neutral. The bank’s core Tier 1
ratio was 14.2% at the end of June, exceeding the 10.5% regulatory minimum. As market participants are
increasingly focusing on Basel III fully loaded capital positions, the implementation of the changes to the
pension scheme will alleviate part of the pressure on Bank of Ireland to increase its Basel III CET1 ratio
above the requirement that the bank expects will be around 10% by 2018.
