Barclays ring-fencing proposals sanctioned by the High Court

21 / 03 / 2018

The High Court has ruled that Barclays’ pensions proposals will not hold up its ring-fencing plans, in a decision that considered widely relevant issues of restructuring defined benefit pension schemes and Pensions Regulator clearance.

Background

The 2013 UK Banking Reform Act requires UK banking institutions to separate or ring-fence retail and small to medium enterprise depository businesses, i.e. the core banking services critical to individuals and SMEs (“ring-fenced bodies”), from the rest of their operations with effect from 1 January 2019. These restructures are known as “ring-fencing transfer schemes”.

From 1 January 2026, pension schemes must be structured so that ring-fenced bodies do not participate as employers in multi-employer pension schemes which include non-ring-fenced bodies.

Banks are required to seek court sanction for their ring fencing transfer schemes under section 111 of the Financial Services and Markets Act 2000 (FSMA). The court must consider whether in all the circumstances it is appropriate to give approval.

The application for approval must be accompanied by a report by a “skilled person” stating whether persons other than the transferor are likely to be adversely affected by the proposals. If it is concluded that there is a potentially adverse effect, the skilled person must state whether they consider that effect is likely to be greater than reasonably necessary in order to achieve the ring-fencing.

Barclays was the first UK bank to make such an application, making the recent High Court decision an important test case. As part of the application, the court considered the impact on Barclays’ pension scheme in detail and discussed issues related to restructuring and Pensions Regulator clearance.

The Barclays pension scheme

Barclays’ defined benefit pension scheme has some 230,000 members and a deficit of approximately £4.8bn as at 30 September 2017. The key aspects of the proposal considered by the High Court are:

  • following the bank’s restructure to separate its ring-fenced body from the rest of the business, the pension scheme will remain intact as one scheme and will not be divided between ring-fenced and non-ring-fenced employers; and
  • the non-ring-fenced global investment arm of Barclays will take over responsibility for supporting the pension scheme.

Barclays faced complaints about this proposal from nearly 100 members, and initial concerns were shared by the Work and Pensions Committee which questioned the Pensions Regulator on the proposals in January 2018.

Concerns focussed on:

  • the covenant strength of the “riskier” supporting employer;
  • whether there were moral issues around the choice of supporting employer, a body which Frank Field termed “expendable” as it was not being ring-fenced, given that most of the scheme’s members work or have worked in the bank’s retail business; and
  • the fact that no application has been made for Pensions Regulator clearance.

The High Court decision

In sanctioning the proposals, the High Court was comfortable that there was a strong foundation to the finding by Grant Thornton, as the skilled person, that although there was a potentially adverse effect on the scheme’s members, the risk had been mitigated. Overall, the potential adverse effect was no greater than reasonably necessary to achieve the ring-fencing.

The mitigation proposals included:

  • the ring-fenced body will continue to participate in the scheme and make contributions up to its exit shortly ahead of 1 January 2026;
  • beyond 1 January 2026, the ring-fenced body will provide collateral amounting to 100% of the technical provisions up to a cap of £9bn;
  • the funding target for the scheme has been brought forward: contributions will target a fully funded position for the fund by 2025 or 2026 rather than 2030; and
  • dividends from the ring-fenced body will be used to meet any deficit contribution that the supporting employer is unable to pay (ceasing when the pension scheme reaches a self-sufficient funding level).

Interestingly, the court found that whether Pensions Regulator clearance had been sought was not relevant to the “adverse effect” issue in question. The court found that clearance was not for the benefit of members but protected the employers from the Regulator’s moral hazard powers. Barclays submitted that a clearance application was not required under the FSMA (Banking Reform) (Pensions) Regulations 2015 as the plans were not “likely to be materially detrimental” to the ability of the pension scheme to meet its liabilities, but the ring-fenced body would apply for clearance in the event that it ceased to be a participating employer earlier than agreed.

In relation to the proposal to keep the pension scheme intact rather than divided into two schemes or segregated into separately funded sections, the court did not see its role as second-guessing the directors’ decisions. It was persuaded that in any event it would not be practical to analyse the employment history of the 230,000 members in order to assign each member to either the ring-fenced or investment arm.

The particular circumstances of the High Court’s decision apply to a limited number of banks, but the court’s comments will be of general interest to trustees and employers considering defined benefit scheme restructures.