Remember the €1.1bn that AIB shoveled into its pension scheme to plug a deficit that prompted all those headlines two weeks ago? A simple question – when the banks were stress-tested in 2011, was this €1.1bn deficit identified in an exercise that cost us about €30m in consultancy fees? The short answer is no, this €1.1bn deficit wasn’t specifically identified in the final report for the stress testing but it remains unclear if a deficit of this magnitude was considered or included in either the base or adverse scenario.
But when asked* in the Dail yesterday, this is Minister Noonan’s response (I’ve read this carefully several times, and it’s still hilarious how it manages to avoid answering the question*):
Minister for Finance, Michael Noonan : The Central Bank has informed me that the Capital Requirements Directive and the Central Bank set the rules around the calculation of the applicable capital base for credit institutions. These rules include reference to defined benefit pension deficits as these can affect the capital base of regulated entities.
In a letter from the Financial Regulator to industry in 2005, banks were informed that those applying IAS 19/FRS 17 are allowed to add back to Tier 1 Capital the amount of the defined benefit pension liability that has accrued in relation to Irish pension schemes in their financial statements and to deduct an amount equal to the sum of (i) the Deficit under the Minimum Funding Requirement plus (ii) three years Supplementary Contributions. A subsequent letter issued by the Financial Regulator in 2009 amended the treatment of the Deficit under the Minimum Funding Requirement element such that credit institutions were required to include at least the Minimum Funding Requirement in its calculation of pension risk under Pillar 2 capital calculations.
The draft Capital Requirements Regulation (CRR) requires the removal of most prudential filters, including the Irish DB scheme pension filter detailed above. Article 461 of the draft CRR, relating to transitional provisions, provides for regulated entities to apply a phased approach to filters and deductions “required under national transposition measures for Articles 57, 61, 63, 63a and 66 of Directive 2006/48/EC” with a five year implementation period. The transitional provisions are the subject of on-going negotiation between the European Parliament (EP) and Council.
The capital base and capital requirements of the PCAR banks were assessed under PCAR and included in this assessment was forecast deductions for defined benefit pension deficits and subsequent capital filters under base and stress scenarios. The FMP report did not disclose details of the assumed levels of deduction for pension deficits. The focus on the PCAR was the forecast income, capital requirements and losses (particularly loan losses) in the three-year period.
The Central Bank included in the PCAR the forecast deduction for defined benefit pension deficits and subsequent capital filters under base and stress scenarios. In addition the Central Bank considered the implications of Basel III (namely CRD IV/ CRR). The PCAR tolerance levels and capital basis were set in accordance with the Central Bank’s definition of Core Tier 1 under the prevailing Capital Requirements Directive rules as at end-March 2011.
It is important to note, that the quality of capital in the Irish banking system has increased significantly as a result of lower tier capital buy backs and Government equity contributions. Whilst it is clear that the Basel III rules impose more conservative deductions than is currently the case, following a recapitalisation to levels determined by the 2011 PCAR, the FMP report stated that all four banks should comfortably meet Basel III Common Equity Tier 1 ratio on a phase-in basis under both the base case and stress case scenarios. The combined surplus to the minimum phase-in Common Equity Tier 1 under the PCAR base case under PCAR was estimated at the time as circa 13.3bn and 3.7bn under the stress case. Three of the banks would also meet the full 2019 minimum standard in the 2013 base case scenario.
*Deputy Pearse Doherty: To ask the Minister for Finance in respect of the €1.1billion top-up made by Allied Irish Banks to the group pension scheme in August 2012, if he will identify in the stress testing undertaken by the Central Bank of Ireland with Barclays Capital, BlackRock and the Boston Consulting Group in early 2011 which resulted in the publication of the Financial Measures Programme on 31st March 2011, where, in this work was the €1.1billion shortfall in the AIB pension fund examined or identified.
in a word ‘NO’ then….
It is becoming a joke these questions are now answered more in the breach than in the observance Our democracy is very, very sick indeed.
Essentially, they included forecasts or assumptions, but made no assessment of the actual figure. Plus, the government (either at the time or now..not sure enough of the timeline to be sure they’re the same) never considered whether there should be conditions on any use of taxpayer capital to refund the pension scheme.
And this answer illustrates total contempt of the Dail. Shame on you, Minister Noonan. Shame on you.
Alarming. I’m starting to believe that Noonan is dangerous. Some manipulation and some audacity to supply that for an answer.
AFAIK there is a procedure in the Dail to get a proper response to questions not answered in a reasonable manner. This response would seem to fall in to this area.
I gave up after the first read through. It reminds of a squid shooting ink out of its arse in order to escape.
Using taxpayers’ money to fill the hole in a private pension fund is not appropriate. The fund’s deficit could have been addressed in a number of ways – reducing future benefits, closing off the pension fund, higher contributions. The scale of the taxpayer gift is very high per eligible employee.
@Ahura, it only improves with multiple readings. For example when it refers to “on-going negotiation between the European Parliament (EP) and Council” and then doesn’t use the acronym “EP” again in the response but at the same time uses the acronym PCAR without spelling out what it means and as for “the Irish DB pension scheme filter”? Seriously, read it a few times, it gets better.
@ NWL, I’ve read this blasted thing a number of times and most of Noonan’s reply seems to be off-topic. This sentence seems to be the relevant bit:”The capital base and capital requirements of the PCAR banks were assessed under PCAR and included in this assessment was forecast deductions for defined benefit pension deficits”.
However this doesn’t tell us how much was included in the calculation. In fact I’ve wasted a bit of time seeing if pension deficits were mentioned by the CB on PCAR documents. Although I can’t claim an exhaustive review, I didn’t see anything on pensions which is surprising as 1.1bn is a substantial proportion of AIB’s recap. I’ve also browsed AIB’s reports to see mention on this staff bonanza. http://www.aibgroup.com/servlet/ContentServer?pagename=AIB_Investor_Relations/Miscellaneous/ir_article_printer&c=AIB_Article&cid=1096576948103&channel=IRFP
It seems that only post recap (well 2011), that there’s a suggest that the AIB group would address the Pension Deficit over the next 15yrs. Surprisingly it doesn’t seem to get addressed in the 2010 reports; the year of the recap. You’d kinda think money earmarked for staff pensions would be mentioned that year.
It may be that AIB staff are using a ‘public sector’ model to run the business for their own benefit. Front-loading the pension contribution raises all sorts of questions.
I wonder how many AIB shares were held in staff pension funds back in 2006 and how this number changed over the years since then. Were these funds buyers, sellers or holders and to what extent might these actions have contributed to the deficit?
@Brian, I do know that Deputy Pearse Doherty asked about top-ups to the pension fund in previous years. He also asked about top-ups at other banks but seemingly that information has been produced yet.
But this is the response in respect of AIB, so I don’t think there were previous year’s deficit resulting from the loss in share value.
http://oireachtasdebates.oireachtas.ie/debates%20authoring/debateswebpack.nsf/takes/dail2012111300063?opendocument
“I have received the following disclosure from the financial institutions of top-ups made to company pension schemes in the years requested:
AIB/EBS
2008 2009 2010 2011 2012 to date
Allied Irish Banks (including EBS) €3.5m €2m €4m €3m €1,101m*
<
* The 2012 figure for AIB includes one off exceptional contributions made in 2012 as a result of the early retirement program which is required in order to reduce the cost base of the bank by over €200m per year.
AIB (including EBS) during the period in question made contributions to its pension schemes in accordance with agreed actuarial funding plans and as required by regulation. Contributions in excess of these were made to address a combination of unscheduled early retirements including ill health related circumstances and the exercise of contractual early retirement rights.
Separately the Deputy will be aware that AIB has agreed the transfer of €1.1 billion nominal of loan assets to the AIB pension fund earlier in 2012. The purpose of this was to address the deficit created in AIB’s pension fund by the early retirement and voluntary redundancy scheme that will see about 2,500 staff leave their jobs.
This transfer was not intended to reduce an existing deficit in the scheme but rather to address the deficit that would arise as a result of the staff departures that would occur as a result of the early retirement and voluntary redundancy scheme."
Re “The purpose of this was to address the deficit created in AIB’s pension fund by the early retirement and voluntary redundancy scheme that will see about 2,500 staff leave their jobs.”
This doesn’t seem to be true. There was an existing (large) deficit. The text below would suggest the hole created by early retirements is a small fraction of 1.1bn
From Page 84 of AIBs 2012 interim report
11 Retirement benefits
The Group’s accounting policy for retirement benefit obligations and the demographic and financial assumptions are set out on page
235 and in note 12 respectively to the consolidated financial statements of the Annual Financial Report 2011.
The Group’s pension deficit as at 30 June 2012 was € 1,457 million (31 December 2011: € 763 million). The net recognised
deficit comprised retirement benefit liabilities of € 5,466 million (31 December 2011: € 4,562 million) and assets of € 4,009 million
(31 December 2011: € 3,799 million).
Arising from the specific terms of the voluntary severance programme which includes an early retirement scheme announced on
21 May 2012 (note 32), AIB has provided € 124 million (31 December 2011: Nil) in respect of past service costs for those employees
expected to opt for early retirement. This provision, which is included within pension scheme liabilities, represents the best estimate of
the amount required to meet the additional past service costs of the early retirement scheme, based on currently known facts and
expectations. In addition, the curtailment gain/loss arising from the voluntary severance programme has been estimated to be Nil at
30 June 2012, based on known facts and expectations at this date.
The Group announced a Pay and Benefits review on 14 June 2012. The impacts of the proposed changes in this review have not
been recognised as these changes had not occurred by 30 June 2012 and were still subject to discussions with relevant parties. The
main proposed changes include the closing of defined benefit schemes to future accrual and certain salary reductions.
@Ahura,
The finance minister Michael Noonan was asked if the €1.1bn contribution to the AIB pension fund in August 2012 was exclusively for the redundancy programme. And the answer appears to be (a) the sum actually handed over to the pension fund was less than €1.1bn which represented the book value of the loans and (2) it seems it was 100% for the redundancy programme
“Deputy Pearse Doherty:To ask the Minister for Finance further to Parliamentary Question No. 205 of 13 November 2012, if he will confirm if 100% of the transfer of €1.1 billion to the Allied Irish Bank pension fund was required to fund the bank’s early retirement and voluntary severance programme; and if not, the quantum required to fund a pre-existing deficit..
Minister for Finance, Michael Noonan: AIB has informed me that the transfer of the €1.1bn portfolio of loan assets was made using arm’s length valuations by two independent external parties and was agreed by both the Trustee and the Board of the Bank. There was a very significant discount applied to the nominal value of the €1.1bn loan assets. AIB has not publicly disclosed the discount applied to the loan portfolio on commercial grounds. The full value of the discounted loan portfolio was required to facilitate the early retirement programme.
The transfer of these assets to the pension fund was needed in order to facilitate the early retirement component of the voluntary severance program of the bank. The early retirement scheme created a Minimum Funding Standard deficit in the pension fund which was bridged by the transfer of the assets. Had the transfer of assets not taken place, the early retirement component of the voluntary severance could not have proceeded as it would have required a cash contribution from the bank. The voluntary severance scheme in the bank overall is expected to result in annual savings to AIB in excess of €200m which is a critical component of AIB’s return to viability.
This transaction was approved by the Board of the bank’s deleveraging committee which includes non-voting observers from the department of Finance and the Central Bank”
@NWL
Like some others, I find the answer was as insulting as it was intended.
In a nutshell;
They handed over the money to the banks €64 billion without even one restriction as to how it would be spent.
Either the board of bank did not inform the government or Central Bank of a huge pension deficit that they were aware of , or the board of the bank was completely unaware of the size of the pension fund deficit at the time of the PCAR. Either way these are serious issues.
If the board of the bank knew of the pension fund deficit and had already decided to put the money into the fund, had informed the Central Bank and the government , but the government then decided to say nothing less it raise public hackles, then this government colluded both before and after the event in diverting scarce taxpayers resources to priming the pension funds of well off bankers.
Either way this was an appalling decision and an even more appalling insult to the Dail.
The decision is proof positive that this government’s priorities are to feather the nests of the financial and other elites in Ireland. They are succeeding very well in that agenda, if at nothing else.
When push comes to shove they don’t give a rat’s a*s about ordinary people.