HBOS pledges to plug £1.8bn pension hole

HBOS, the Halifax and Bank of Scotland banking group, plans to wipe out the £1.8bn hole in its pension fund by making a "substantial" initial injection to the fund next year followed by a series of smaller contributions in subsequent years.

Analysts said HBOS was demonstrating its confidence in its financial position. The bank ignited its shares by using yesterday's statement to announce plans to return at least £750m to investors next year and tell analysts that it would beat their expectations for 2005 profits.

Its shares were the fastest gainers in the FTSE 100, rising 4.5% or 39.5p to 906.5p, as analysts upgraded profits forecasts and increased their target for the shares. James Crosby, the HBOS chief executive, said the bank would put aside £1bn at the end of this year to tackle the deficit in the pension fund which has been closed to new members for at least three years. "We are setting aside £1bn," he said, describing it as a "radical" move.

There are two measures for the deficit: under the actuarial calculations the gap is £800m but under international accounting rules the deficit is £1.8bn.

The bank intends to use the £1bn to first tackle the £800m deficit and will then target the larger accounting hole in subsequent years. While HBOS set itself a target to pay off the actuarial deficit over a five-year period, analysts calculated it could be eradicated within a year.

"It's a debt like any other and [for] a financially strong business like ours accelerating the elimination of that deficit is simply doing the prudent thing," Mr Crosby said.

The bank is also thought to be planning to enrol any member of its staff who is not enrolled in its money purchase pension scheme into the plan, a move suggested by the recent Turner report into pensions.

Mark Thomas, analyst at investment bank Keefe Bruyette & Woods, said: "This sends a very positive signal about the confidence [of HBOS]."

In making the pledge, pensions experts said HBOS is pre-empting upcoming rule changes. The National Association of Pension Funds noted: "The HBOS move is unusual in terms of the amount of the deficit but under new funding requirements all defined benefit schemes are going to have to pay [the deficits] off over a period of time."

Bob Scott, partner at actuaries Lane Clark & Peacock, said unlike other companies taking steps to close their pension fund deficit HBOS was not requiring members of the scheme to increase their contributions. Other firms - such as BT and the Royal Bank of Scotland - have made or are planning to make injections into their pension schemes to tackle shortfalls. RBS put more than £900m in its fund last year but no bank is thought to have made a pledge to eradicate its deficit entirely.

In promising to give back surplus capital to shareholders, HBOS helped to dampen speculation that it was planning an acquisition in Australia. The bank - which bought back almost £1bn of shares this year - is to set its 2006 shareholder buyback "initially" at £750m, leaving the door open to increase the size of the buyback during the year.

While Mr Crosby was careful not to rule out acquisitions entirely he made it clear HBOS was determined not to build up a "war chest" with which to make acquisitions. The group, the country's biggest mortgage lender, reassured the market that it had encountered no deterioration in its bad debt position since its interim results in the summer. It also highlighted its international operations which now make up 13% of profits.