UK - Trustees of the pension fund of troubled British bank Northern Rock today revealed there is a £100m (€132m) shortfall in its assets of the final salary section of the scheme, and assets have been moved into bonds amid concerns about the company's future.
Moreover, trustees might ask potential bidders up to £200m to fund the gap if a bid is successful.
The deteriorated state of the bank's finances yesterday prompted David Chapman, chairman of the fund's trustees, to write a letter to Rock staff who are members of the final salary pension fund, detailing the fund's new investment strategy.
According to Chapman, mid-October the fund took the assets it had in equities, around half of the entire £355m, and now over 93% of the fund is invested in gilts, bonds and cash deposits with the remainder represented by small holdings in property and private equity investments that are less easily realised in the short-term.
Moreover, the fund has announced a more cautious actuarial approach, the underlying asusmptions of which still need to be agreed and finalised with Northern Rock.
"On the basis of these more conservative assumptions and assuming that our current prudent approach to future investment strategy does not change, the draft valuation would show a deficit...of approximately £100m," wrote Chapman in the letter.
He added, however, if the trustees in future decide to change back to the scheme's previous investment strategy, the draft valuation under discussion would show a substantially improved position, possibly even a small surplus.
The immediate impact of the new valuation would be minimal, as benefits will be paid as usual.
However, a potential buyer for the Rock, such as the currently touted Virgin and Olivant, would be expected to provide a commitment of additional funding measures to plug the hole.
Chapman wrote in his letter if the scheme were to be wound up and a buyout of an insurance company became necessary, additional funds of up to £200m would have to be paid into the scheme.
The fund appointed Penfida Partners, a corporate financial adviser firm to pension trustees, in September to work alongside its legal advisers Mayer Brown International and actuary and investment consultant Watson Wyatt.
"In addition, the trustees and the company agreed to appoint The Law Debenture Pension Trust Corporation plc as an independent professional trustee," the letter read.
This latest news came as Northern Rock announced it will start paying back some of its £26bn borrowing from the Bank of England through the sale of lifetime equity release mortgages, worth £2.2bn, to the US investment bank JPMorgan.
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