Group-wide bank pension schemes will be separated and ring-fenced under Treasury proposals to break-up the UK banking sector unveiled today.
Under the break-up plans, which were published for consultation in a white paper Banking reform: delivering stability and supporting a sustainable economy, the retail and investment sections of banking groups will be separated and ring-fenced.
The Treasury noted, however, that current pension regulation means that in some cases even if a bank is ring-fenced it could still be liable for any deficit in the group-wide pension scheme if the wider banking group fails.
'This may threaten the economic independence of any ring-fenced bank which is jointly and severally liable for contributing towards pension deficits arising elsewhere in the group,' it said.
Last September, the Independent Commission on Banking recommended the removal of ring-fenced banks' liability for wider banking group pension liabilities, or at least measures to ensure any impact is mitigated.
Agreeing with this, the Treasury said banks should separate pension funds for ring-fenced sections of their banking group 'using commercial means'. This would 'ensure that the ring-fenced bank cannot be made jointly and severally liable for any pension deficit arising elsewhere in the group'.
However, due to the 'problematic' size of banks' pension deficits at the moment, the Treasury recommended that banks be given until 2025 to achieve 'full separation' of their schemes.
Views were invited on the appropriateness of this date, but the Treasury said this would not increase the time allowed for banks to fulfil their recovery plan agreements with pension trustees.
'Banks and trustees will need to agree appropriate plans necessary to ensure that banks are able to afford a separation by the 2025 deadline,' it added.
Views on the white paper can be made until September 6, after which legislation to bring into effect the changes proposed will be introduced as soon as parliamentary time allows, with the aim of bringing the ring-fenced system into effect by May 2015.