Banks feel pain of DB liabilities
UK - Defined benefit (DB) pension liabilities of some of the world's largest banks are now significantly greater than the bank's equity market value, according to Pension Capital Strategies (PCS).
The advisory firm's latest report on the FTSE100 pension schemes revealed equity investments held by the pension schemes of HBOS, Lloyds TSB and RBS may outstrip the bank's own equity market values.
It said this could make the already troubled banks even more vulnerable to falls in the stock market and noted the analysis would suggest pension schemes had enjoyed a "good" third quarter.
But managing director Charles Cowling warned against schemes being complacent.
He said: "In the last few days and weeks we have seen unprecedented conditions in financial markets. The fact that accounting rules may show a positive impact on pension schemes from this market turbulence does not mean that these are easy times for pension schemes."
Cowling explained the improvement in pension surpluses was down to the accounting value of the liabilities falling even more than scheme assets but said this was because accounting rules stated the value of liabilities should be linked to the value of high quality AA bonds.
He added: "A large number of AA bonds are in the banking and financial sector and have been hit hard by the recent dramatic problems.
"The extreme market conditions we have experienced in October have not only caused turmoil in the banking sector, but they have also significantly increased the risks associated with the banks' own DB pension schemes."
It said this could make the already troubled banks even more vulnerable to falls in the stock market and noted the analysis would suggest pension schemes had enjoyed a "good" third quarter.
But managing director Charles Cowling warned against schemes being complacent.
He said: "In the last few days and weeks we have seen unprecedented conditions in financial markets. The fact that accounting rules may show a positive impact on pension schemes from this market turbulence does not mean that these are easy times for pension schemes."
Cowling explained the improvement in pension surpluses was down to the accounting value of the liabilities falling even more than scheme assets but said this was because accounting rules stated the value of liabilities should be linked to the value of high quality AA bonds.
He added: "A large number of AA bonds are in the banking and financial sector and have been hit hard by the recent dramatic problems.
"The extreme market conditions we have experienced in October have not only caused turmoil in the banking sector, but they have also significantly increased the risks associated with the banks' own DB pension schemes."
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