IRELAND - Trustees for Allied Irish Bank's recently closed Irish defined benefit (DB) pension fund are set to receive a €1.1bn loan portfolio from the bank in an effort to address a €760m funding shortfall.
AIB, bailed out by the Irish government and 99.8% owned by the National Pensions Reserve Fund, said the deal came as part of its "continuing strategy" to comply with the Central Bank of Ireland's Prudential Liquidity Assessment Review (PLAR) that has set new minimum capital requirements - necessitating a de-leveraging of its balance sheet.
In a statement, the bank said: "The transaction was completed on an arms-length basis, with both the bank and the pension trustees conducting independent valuations of the assets.
"It should be noted that the pension scheme trustees, based on the taking of extensive professional advice, are satisfied that the asset acquisition - based on the terms and conditions negotiated - is in the best interests of all of the scheme's members."
While it would not be drawn on the level of writedown the loan portfolio endured, it said the discount was "substantial", but nonetheless in line with the Prudential Capital Assessment Review (PCAR) conducted by the central bank in 2011.
"This transaction was approved by the board and the bank's deleveraging committee, which includes non-voting observers from the department of finance and the central bank," the statement said. "The bank also consulted with the [Pensions Board] as part of the process."
The current regulatory framework does not require the Pensions Board to formally approve the transaction, with its permission only needed when submitting funding proposals or reducing benefits under Section 49 and Section 50 of the 1990 Pensions Act. However, the trustees must nonetheless ensure they are acting within the regime's framework.
At the end of last year, AIB's Irish DB scheme reported a deficit of €763m, believed to have increased to €1.4bn by the end of June.
In an effort to cut employment costs, the bank in March announced proposals to lay off 2,500 staff - with early retirement on a reduced pension one of the options open to employees.
Today's statement confirmed that the portfolio transfer would allow the early retirement programme to proceed as planned, with the bank aiming to reduce wage costs by €200m.
Commenting on one of the possible reasons for the transaction, Emer Lang of Davy Research said: "Basel III capital rules will increase the pressure on banks to tackle pension deficits ahead of the start of the transition period in 2014, as pension deficits will ultimately be fully excluded from regulatory capital from 2019."
AIB announced the closure of its defined benefit schemes in both Ireland and the UK in June, with all remaining staff shifting to a defined contribution arrangement.