Bank of Ireland Plc said its pension deficit will narrow by an initial 400 million euros ($550 million) under a plan to cut employee retirement benefits, in an accord that eases the way for the nation’s largest lender to repay part of its state bailout.
The deal, supported by the bank’s biggest labor union, centers on how future pay increases are treated for pension purposes, the Dublin-based bank said in a statement today. Should workers back the changes, the bank will then inject an additional 400 million euros into the pension plan over time, according to a person with knowledge of the matter, who asked not to be named as the proposal isn’t public.
Narrowing the bank’s 1 billion-euro pension deficit would lower the capital it needs to raise to refinance 1.8 billion euros of state-owned preferred shares. Bank of Ireland Chief Executive Officer Richie Boucher is weighing options, including a share sale, to repay the government by the end of March. If the shares are not redeemed by then, the amount owed rises 25 percent.
“Dealing with the pension deficit is crucial from a capital perspective,” said Emer Lang, an analyst at Dublin-based securities firm Davy, pointing to incoming banking rules that will deduct pension deficits from regulatory capital from 2019.
Officials from Bank of Ireland and the IBOA Finance Union declined to comment on the bank’s planned contribution.
A pension agreement “is likely to be the first of a number of interlinked actions” as the bank seeks to refinance the preference shares, according to Lang, who has an outperform rating on the company’s stock.
The bank and government are seeking European regulatory clarity on whether the preferred shares would continue to count as core Tier 1 capital, a measure of financial strength, if some are sold to private investors, according to people with knowledge of the matter.
Preferred shares can only be included as core Tier 1 capital until the end of 2017, under incoming international banking rules. If some of the securities are sold to private investors in the meantime, regulators may phase out their capital benefit more quickly, Ciaran Callaghan, an analyst at Merrion Capital in Dublin, said in a note on Oct. 16.
Bank of Ireland fell 1.1 percent to 26 cents at 2:01 p.m. in Dublin trading. The stock has risen 130 percent this year, giving it a market value of 7.9 billion euros.
“The review of the pensions in Bank of Ireland has involved protracted and difficult negotiations between the parties,” said Larry Broderick, general secretary of the IBOA union. If staff back the plan, it “should secure the defined benefit scheme into the future.”