The £25bn Barclays UK Retirement Fund will have two main sections from 1 July this year to comply with bank ringfencing rules coming in from 2026. The section backed by the retail entity will only contain active members employed by the high street part of the bank, with the investment bank sponsoring the section for all other members.  

In 2013, in the wake of the global financial crisis, the government required banks to ‘ringfence’ large retail operations from 2019, to protect depositors from any potential shock their bank’s investment arm might suffer. As part of this, it set out that retail banks must not be responsible for any pension obligations related to the non-ringfenced parts of a bank from 1 January 2026. 

Ahead of this deadline, Barclays has said it will comply with the requirements by splitting its defined benefit pension fund in two. The Barclays UK Section will take all active members employed by Barclays Bank UK plc – the deposit-taking bank – while the Barclays Bank Section will be for active members employed by Barclays Bank plc and Barclays Execution Services Ltd, as well as for deferred and pensioner members of the UKRF. The UKRF will continue to have the same trustee and advisers after sectionalisation. 

The pension fund said that “both sections will benefit from strong collateral arrangements underpinning any deficit that might emerge in future”. 

Should either of the sections have a deficit, the relevant sponsoring employer will provide a pool of assets as security. The trustee will have access to this if Barclays does not pay a deficit reduction contribution or becomes insolvent. The pool covers 100% of the funding deficit up to £9bn. 

In case of a scheme deficit, the security arrangements will be used to provide the necessary collateral. At the interim valuation in September 2024, no collateral was needed as the 2022 valuation showed a surplus. In 2024, the scheme was 108% funded with a £1.8bn surplus, and the trustees have agreed to Barclays continuing to pause contributions, which were first stopped after the 2022 valuation. 

UKRF has a £7bn and a £5bn longevity swap in place. Its assets are held mainly in liability-driven investments, credit and property, and it has a 14% allocation to private equity and hedge funds. 

A Barclays spokesperson said the planned sectionalisation “will not change the financial position of the UKRF from a consolidated Group perspective, and members’ benefits will be unchanged as a result of the actions Barclays is taking to meet its regulatory obligations”, adding that the planned changes “are consistent with the approach taken by other UK banks”.  

As of February this year, there are now five UK banks with one or more ringfenced bodies. Apart from Barclays, most or all of them have already adjusted their pension arrangements.

HSBC created the HSBC Global Services (UK) Ltd Section in 2015 and a section for employees of the non-ringfenced bank on 1 July 2018.

NatWest – formerly RBS, the bank bailed out to the tune of £46bn – signed a memorandum of understanding with its pension trustees in 2018 to compensate the scheme for a loss of covenant strength in the Main Section as it decided to remove some employers from it. Liabilities relating to the Royal Bank of Scotland – now NatWest Markets – and the Royal Bank of Scotland International were apportioned to National Westminster Bank plc, with new sections of the pension fund sitting outside the ringfence. The MoU also contained a commitment to derisk pension investments.

Lloyds Banking Group has a sectionalised DB scheme whose sponsoring employers sit within the ringfenced bank, as do the relevant employees. mallowstreet understands that Santander UK is already compliant with the incoming regulations.
   

 

The Barclays UKRF annual report states that sectionalising the scheme required “significant” preparation last year and will also create considerable work this year. 

For trustees, a change of employer and therefore covenant strength has pitfalls and can involve difficult negotiations. 

With an exercise like this, “the key for trustees is to stay close to the process and seek to ensure there is no loss of covenant support for the schemes or sections post the changes”, said Michael McElligott, a director at covenant advisory Cardano. 

One option is to split the scheme’s liabilities between the ringfenced and non-ringfenced parts of the bank consistent with the existing split between employers, while in other cases, splitting the liabilities with reference to the employers’ respective contributions to the covenant might be more appropriate, he explained.

“Deviating from these principles, for example allocating the liabilities in their entirety to one arm of the bank, is where detriment might arise resulting in covenant mitigation being required,” he said, or funding and investment strategies having to be revisited. He claimed several of the affected banks have had to provide mitigation. 

 

 

The rules taking effect in 10 months’ time address the risk that retail banks might take a hit from backing the pension liabilities of investment banks. However, seven years ago, there was also concern about pension scheme members where their benefits are backed by non-ringfenced banks.  

 

The Barclays scheme’s sponsorship came under scrutiny when Frank Field, the late former chair of the Work and Pensions Committee, sent a letter to the chief executive of the Pensions Regulator in 2018. Field expressed concern about pension scheme members, saying the “casino” part – the investment bank – of Barclays would be backing the pension promise to all members under the bank’s initial proposals, at a time when the scheme had a multi-billion-pound funding hole. Lesley Titcomb replied that Barclays had not made a clearance application or received clearance for its proposed arrangement, noting also that there was collateral in place for the pension fund.  

 

 

In October last year, the Treasury announced that it plans to relax ringfencing rules in response to a 2023 consultation “as soon as parliamentary time allows”. Among others, this will involve a secondary threshold that will exempt banks from the regime if their investment banking activities constitute less than 10% of their tier 1 capital. It will also lift the deposit threshold for retail banks to come in scope to £35bn from currently £25bn.