Bank of Ireland to inject €400m into pension fund after deal to cut benefits

Bank of Ireland said its pension deficit will narrow by an initial €400m under a plan to cut employee retirement benefits, in an accord that eases the way for the nation’s largest lender to repay part of its state bailout.

The deal, supported by the bank’s biggest union, centres on how future pay increases are treated for pension purposes, the bank said yesterday.

Should workers back the changes, the bank will then inject an additional €400m into the pension plan over time, according to sources.

Narrowing the bank’s €1bn pension deficit would lower the capital it needs to raise to refinance €1.8bn of state-owned preferred shares.

Bank of Ireland chief executive Richie Boucher is weighing up options, including a share sale, to repay the Government by the end of March. If the shares are not redeemed by then, the amount owed rises 25%.

“Dealing with the pension deficit is crucial from a capital perspective,” said Emer Lang, an analyst at Davy, pointing to incoming banking rules that will deduct pension deficits from regulatory capital from 2019.

Officials from Bank of Ireland and the Irish Bank Officials Association declined to comment on the bank’s planned contribution.

A pension agreement “is likely to be the first of a number of interlinked actions,” as the bank seeks to refinance the preference shares, according to Mr Lang, who has an outperform rating on the company’s stock.

The bank and the Government are seeking European regulatory clarity on whether the preferred shares would continue to count as core Tier 1 capital, a measure of financial strength, if some are sold to private investors, according to sources.

Preferred shares can only be included as core Tier 1 capital until the end of 2017, under incoming international banking rules.

If some of the securities are sold to private investors in the meantime, regulators may phase out their capital benefit more quickly, Ciarán Callaghan, an analyst at Merrion Capital in Dublin, said in a note on Oct 16.

Bank of Ireland closed down 0.2c to 26.3c on the Iseq last night. The stock has risen 130% this year, giving it a market value of €7.9bn.

“The review of the pensions in Bank of Ireland has involved protracted and difficult negotiations between the parties,” said Larry Broderick, general secretary of the IBOA union. If staff back the plan, it “should secure the defined benefit scheme into the future.”

Bloomberg