Barclays Bank coughs up £750m in unusual DRC move

In a newsletter to members, the trustee of the scheme states that the bond, which is backed by government gilts, “entitles the UKRF to twice-yearly interest payments, with full repayment in cash of the £750m in three equal instalments of £250m in 2023, 2024 and 2025”.

The 2020 interim Barclays results confirm that on June 12 the bank paid the £500m deficit reduction contribution agreed for 2020, while at the same time the scheme subscribed for non-transferable listed senior fixed rate notes for £750m, backed by UK gilts.

The senior notes were issued by Heron Issuer Number 2 — an entity that is consolidated within the group — which acquired a total of £750m of gilts from Barclays Bank for cash to support payments on the senior notes.

This is a good investment for the UKRF, supporting the security of members’ benefits by providing stable, predictable cash flows that are well suited to pensions

Barclays Bank UK Retirement Fund trustees

Trustees pleased with unusual deficit agreement

Several experts have pointed out that this is a rare arrangement, since when it comes to deficit repair contributions, hard cash is king.

Stephen Scholefield, partner at Pinsent Masons, explains: “Arrangements like this are unusual due to the need to comply with the employer-related investment laws.”

For most schemes, you cannot normally invest more than 5 per cent of the scheme’s assets in employer-related investments. 

Penny Cogher, partner at Irwin Mitchell, cautions: “Even if you can self-invest up to 5 per cent, you should still be thinking of whether you should be self-investing.”

Jeremy Harris, partner at Fieldfisher, notes that the arrangement could be an asset-backed contribution.

“It tends to involve quite an elaborate structure whereby an asset is retained within the group while giving the pension scheme access to the income produced by the asset, and also security with potential for the asset to go into the scheme if the employer fails,” he says.

“Asset-backed contributions are concepts recognised by both the HM Revenue & Customs and the regulator.”

David Davison, director at Spence & Partners, says that “very few businesses have the wherewithal to provide the facility required”. 

“The fact that it is backed by gilts would give the trustees’ additional security,” since it is not just backed by the sponsor or its covenant, Mr Davison notes.

He points to a similar trend “where insurers who sponsor pension schemes being party to longevity transactions involving the scheme”, giving the example of Aviva. “Perhaps the sort of ideas seen for a few years in the insurance world are moving across to other financial businesses,” he adds.

Nevertheless, the scheme trustees’ belief, which is backed by their advisers, is that “this is a good investment” for the pension fund, “supporting the security of members’ benefits by providing stable, predictable cash flows that are well suited to pensions”.

“The trustee is pleased to have reached this agreement with Barclays at this challenging time,” the newsletter reads.

The deficit repayment will help the scheme to continue its path towards self-sufficiency, with positive results in the past three years.

As at September 30 2019, the scheme’s deficit dropped to £2.3bn from £7.9bn in 2016. This equates to the funding level increasing to 94 per cent in 2019 from 81.5 per cent in 2016.

Schemes take advantage of alternative funding options

Despite the Barclays case being considered one of a kind, scheme trustees have a whole slew of alternative options when it comes to deficit payments.

Alistair Russell-Smith, head of corporate defined benefit at Hymans Robertson, cites an example of having “a low level of core deficit contributions, with investment returns on the scheme’s assets closing the rest of the deficit”.

“Additional contingent contributions are then payable if those returns do not come through to give an underpin to the anticipated asset performance. There are then non-cash funding solutions — like providing security to the pension scheme — which enhance the covenant position for the scheme, supporting a longer recovery plan or lower funding target.”

Some sponsors have considered transfer of ownership, or offering security over tangible assets such as physical assets and buildings.

Aon’s Global Pension Risk Survey 2019 showed that more than a third of schemes already used or planned to make use of parent company guarantee to support the scheme, with escrow arrangements — mainly to avoid trapped surplus — being the next most common form of alternative financing.

Isio director Iain McLellan has also seen “increased sophistication in funding agreements between trustees and sponsors via the use of either contingent contributions and or support”.

2020 DRCs on target despite Covid-19 disruption

The maelstrom of the pandemic has almost destroyed swathes of the UK economy, but DB schemes have held up better than could be expected. Tom Jackman, partner at Sackers, points out that “most schemes are on track to receive the 2020 DRCs as planned”.

It is the fall in yields that has really hurt pension scheme funding. Mr Russell-Smith stresses that “schemes that have been well hedged have been protected from this and may still be on or ahead of plan”.

“Recovery plans are therefore stressed in cases where either the scheme has not been well hedged so funding is behind plan, or the ability of the sponsor to carry on paying the existing schedule is compromised,” he says.

“In these cases, upcoming valuations are likely to be far more challenging for companies and trustees.”