NAB reforms UK pensions

NATIONAL Australia Bank's British business continues to come under focus as it overhauls its pension scheme for the second time in five years.

By InvestSMART · 30 Sep 2011

By InvestSMART ·
30 Sep 2011

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NATIONAL Australia Bank's British business continues to come under focus as it overhauls its pension scheme for the second time in five years.

The changes may lead to a one-time cash injection into the out-of-money defined-benefits fund that covers about 5600 staff. The move comes on the heels of a credit rating downgrade for British-based Clydesdale Bank, triggered by continuing speculation of a possible sale of the business.

NAB is said to be holding informal talks with two separate London-based buyout funds to sell all or part of Clydesdale as part of a longer-term plan to leave the tough British market.

But NAB chief executive Cameron Clyne this week said the commitment to the bank's British business "had not changed".

But as part of the changes to the pension scheme, NAB has asked staff to make more contributions if they want to retain the same level of payouts on retirement.

"The reforms aim to reduce complexity and make the scheme more sustainable by reducing the volatility, cost and risks associated with it," NAB said in a note to its staff in Britain.

Latest accounts show NAB's pension plan had an operating deficit of #117 million ($A186 million), although this was down sharply from a deficit of #360 million a year earlier.

Mid-last decade NAB consolidated its three British pension schemes and made a #100 million injection. The move was aimed at reining in a deficit that at the time had topped $A1 billion.

NAB also shifted the way defined payments were calculated to prevent further blowouts in the scheme. Australian companies largely closed their defined-benefit pension plans during the 1990s, shifting to contribution plans where the employee takes the market risk. NAB will consult with its staff in Britain over the next two months on the changes.

NAB, like most other banks, remains concerned about funding for future liabilities, particularly under stricter accounting rules that bring pension liabilities directly on to the bank's balance sheet.

Meanwhile, NAB's chief financial officer, Mark Joiner, this week held a series of meetings with fund managers, reiterating his position that NAB was not a forced seller of the British assets. But analysts argue NAB should consider selling the $4 billion-plus business if the right opportunity came along.

"NAB's existing UK banking business is not creating shareholder value and this situation is unlikely to change in the forseeable future," said BBY analyst Brett Le Mesurier.

NAB shares finished 45? lower at $22.50.

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Frequently Asked Questions about this Article…

What pension changes is NAB making to its UK pension scheme?

NAB is overhauling its UK pension scheme for the second time in five years, aiming to reduce complexity, volatility, cost and risk. The changes could include a one‑time cash injection into an out‑of‑money defined‑benefit fund covering about 5,600 staff, and staff have been asked to increase contributions if they want to retain the same level of retirement payouts.

Why is NAB reforming its British pension plan now?

NAB says the reforms are designed to make the scheme more sustainable and reduce risks and costs. The bank remains concerned about funding future liabilities—especially under stricter accounting rules that put pension obligations on the balance sheet—and is responding to an operating deficit and past volatility in the plan.

How large is NAB’s UK pension deficit and has it improved recently?

According to the latest accounts cited in the article, NAB’s UK pension plan had an operating deficit of £117 million (about A$186 million), which is a sharp improvement from a £360 million deficit a year earlier. Mid‑last decade NAB consolidated three British schemes and injected £100 million after deficits once topped about A$1 billion.

What will these pension changes mean for NAB employees in Britain?

Employees in Britain may need to make higher contributions if they want to keep the same level of retirement payouts. NAB has said it will consult with its UK staff over the next two months about the proposed changes and the impact on benefits.

Is NAB planning to sell Clydesdale Bank or other UK assets?

The article says NAB has held informal talks with two London‑based buyout funds about selling all or part of Clydesdale as part of a longer‑term plan to exit the tough British market. However, CEO Cameron Clyne said the bank’s commitment to its British business has not changed, and the CFO told fund managers NAB is not a forced seller.

What triggered the recent focus on NAB’s British business and Clydesdale Bank?

The spotlight intensified after a credit rating downgrade for Clydesdale Bank, which was triggered by ongoing speculation about a possible sale. That downgrade and pension issues have increased investor and analyst scrutiny of NAB’s UK operations.

How could NAB’s pension reforms and UK strategy affect everyday investors?

For investors, pension liabilities and possible UK asset sales matter because they can affect NAB’s balance sheet, capital requirements and shareholder value. Analysts quoted in the article say the UK business has struggled to create shareholder value, and market reaction has pressured NAB’s share price (the shares finished lower at A$22.50 in the report).

What are the next steps NAB will take on pensions and its UK business?

NAB will consult UK staff about the pension changes over the next two months. Management has also held talks with potential buyers and met fund managers to discuss strategy, but company leaders have publicly said the bank isn’t a forced seller of its British operations.