This guide was last updated in December 2013
Ring fencing will potentially create a number of practical difficulties from an employment law perspective
Is there an employing entity for the whole bank? Given the requirement for independent operation it may be necessary to move employees for the ring-fenced body of the bank to a new employing entity and TUPE applies to a business transfer between two companies within a group.
For a ring-fenced body of the bank to operate independently it will require support functions. Can you identify employees who will support the ring-fenced area only? If not, you will have to consider the assignment of a team.
Ring-fenced bodies must act in accordance with human resources and remuneration policies meeting 'specified requirements'. It is currently unclear what these are but is likely to create the need for a review of bank policies and may cause employee relation and recruitment issues if there is a disparity between employees inside or outside the ring-fenced body.
Ring fencing will also have considerable implications for pension arrangements, because the bar on cross-subsidy of the investment arm by the retail arm will extend to pension arrangements. All major banks have defined benefit liabilities, whether historic or continuing to accrue.
Significant question marks exist over whether bank schemes will need to be effectively 'demerged', or whether a segregation would be desirable on the terms permitted. It is also unclear whether it is possible or preferable for the retail arm to be cross-subsidised by the investment arm.
Assuming a split or demerger of some sort if required, this poses several further questions relating to the treatment of assets and liabilities. With regards to assets, several questions will need to be asked, such as:
- will assets need to be split or can current arrangements continue under a common investment fund, with a notional allocation between the two?
- will current investment management arrangements be split pro rata or will they be allocated differently? What impact will that have on charges with each manager?
- many banks have put in place special purpose vehicles to allow the pension scheme to share in returns on corporate assets. Will those be split in two, unwound or allocated to one scheme or the other? We know from practical experience that unwinding special purpose vehicles requires careful consideration.
Questions regarding treatment of liabilities are equally complex.
- For pensioners and deferred scheme members, will provision be allocated on a pro rata basis or by reference to where they sat in the bank - even though the hard division between retail and investment had not been considered at the point at which they were paying into the scheme?
- Should this be done by identity of last employer or by periods of service? Or will one bank - presumably the investment bank - assume all of the historical pensions liabilities in return for some kind of dowry and, if so, how is that dowry to be assessed? What constitutes a cross-subsidy for this purpose?
- For active scheme members, will their pension liabilities be allocated by reference to their current employer, or by reference to their periods of service?
- How should orphan liabilities be allocated?
- Is the bank's data in good enough shape to communicate effectively with current and past scheme members?
- In future, employees will transfer between the two arms of the bank. How will their pension liabilities be dealt with? Will it be possible to allow the employee to retain pension benefits in each scheme by reference to their final pensionable salary, where there is still future accrual?
- Again, practical experience of setting up such arrangements between connected but separate pension schemes, including establishing rules governing the calculation and funding of benefits in each scheme, shows this is complex.
- Or will employees be required to transfer their entitlements between the two schemes each time - if so, how must transfers be funded for so as not to infringe the bar on cross-subsidy?
A potential demerger could also impact upon the covenant and thus on investment strategies and employer contribution programmes.
The covenant of the investment bank will most likely have been weakened by the removal of the support of the retail arm. Whether this weakening will be sufficient to affect the trustees' assessment of the appropriate investment and funding strategy of the scheme is an important question with significant implications.
There is also uncertainty over the impact on the covenant of the retail bank. The Government's reforms are put forward on the basis that investment banking bears some inherent risks that it is not appropriate for a retail bank to bear. Those risks are being removed, which should therefore strengthen the covenant. Set against that, if the retail bank is not eligible to be supported by the investment bank, it will no longer have access to that bank's assets at times when the retail arm is doing poorly but the investment arm is doing well, leading to a weakening of covenant at least in some circumstances. This will change the risk profile of the retail bank's covenant and may cause trustees to reassess the appropriate investment and funding strategies.
Full separation is not to be required before 2026 and the detailed regulations will be vital for determining what strategy is adopted and how it is pursued. However, but banks would be well-advised to start considering their pensions position now.
The customer impact
An engaged and engaging workforce will do more for a bank's brand than any level of advertising or public relations. By ensuring that customer-facing staff in particular are aware of any changes to their terms and the reasons for that, banks can head-off the risk of low morale or even industrial action which might negatively affect the customer experience.