AIB Bid to Plug $1 Billion Pension Gap Backed by Labour Court

Allied Irish Banks Plc, the nation’s largest lender before its government bailout, won backing from an arbitration court to shut down its defined benefit pension plan, which has a 789 million-euro ($1 billion) deficit.

The bank should be able from December to move employees in its defined-benefit plan, where pensions are linked to final salaries, to a defined-contribution plan, where benefits depend on the performance of investments, according to today’s ruling by the Labour Court in Dublin. The defined-benefit plan was closed to new entrants in 1997.

The decision removes an obstacle to Allied Irish’s attempt to return to profit during 2014 and to private ownership thereafter. The government owns 99.8 percent of the lender after providing a 21 billion-euro bailout. Pension deficits will be deducted from banks’ core capital ratios, a gauge of financial strength, when the next round of international banking rules, known as Basel III, take effect in 2019.

“Sorting out the pension issue removes some of the uncertainty surrounding the group and will help its capital position,” Colm Foley, an analyst at Dublin-based Goodbody Stockbrokers, said by telephone. “It also helps the bank to start building up an investment case as it looks to return to private hands at some stage in the future.”

While the court’s decisions aren’t legally binding, Allied Irish said it will start to consult employees in coming weeks. The Irish Bank Officials Association, the lender’s labor union, will ballot its members on the decision by the end of July.

The court “is fully satisfied that the implementation of the changes which it now recommends are crucial to ensuring the future viability of the business and protecting employment,” it said in a statement published by the IBOA.

Allied Irish, which had by the end of last year eliminated 1,700 jobs of a planned 2,500 by 2015, will maintain its voluntary severance terms for departing employees until March that year, according to the IBOA.

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