UK - Northern Rock has reported an accounting surplus in its defined benefit (DB) scheme of £31.7m (€35.4m), despite previous estimates by trustees of a £100m deficit.

Figures from the 2008 annual report of the bank, taken into ‘temporary public ownership’ in February last year, showed the value of the scheme assets had increased over the year from £360.3m to £367.5m.

In addition, Northern Rock reported the present value of DB pension obligations dropped from £354.6m to £335.8m, leaving a surplus in the pension scheme of £31.7m, up from a surplus of £5m at the end of 2007.

The report confirmed the asset allocation of the scheme is extremely conservative, with 93% of the assets held in government and other corporate bonds, while property and equities are both allocated 3% and the remaining 1% is held in cash.

Details from the document showed the current service cost of running the DB scheme in 2008 also decreased slightly from £11.2m to £8.3m, while the firm noted “the level of employer contributions for 2009 are still under discussion between the company and the Pension Fund Trustees. If contributions are retained at 2008 levels, the estimated employer contributions for 2009 would be £6.5m”.
   
The disclosure of a £31.7m surplus is in contrast to the £100m deficit highlighted by trustees of the scheme in January 2008, after it requested a valuation using more conservative assumptions following the precarious financial position of the bank. (See earlier IPE article: Rock scheme shifts to bonds on future worries)

It has been suggested the difference relates to the fact that the surplus recorded in the annual report is calculated on an IAS19 basis, while the trustees looked at the funding level on a stand-alone or self-sufficiency basis, which still results in a deficit to the scheme.

Since the bank revealed the extent of its financial troubles, the trustees have repeatedly requested a guarantee or additional security for the pension scheme deficit from the government and the new management team, but without success. (See earlier IPE article: Sandler to decide fate of Northern Rock pension scheme)

In August the chairman of the trustees, Sir David Chapman, told members that talks with Northern Rock had stalled over “fundamental difference” in investment strategy, as the trustees are worried the 93% allocation to bonds could lead to a “significant deficit” and lead to higher contribution rates. (See earlier IPE article: Northern Rock pension talks reach impasse)

Since then it is believed that negotiations between the trustees and the company have been continuing, but so far the issues have not been resolved.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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