Lloyds loss yields hard lessons for pensioners

A dispute over a move by Lloyds bank to buy back a batch of high-interest bonds from investors ended with the Court of Appeal siding with the bank last week.

The furore goes back to a decision made during the financial crisis. As part of its taxpayer-backed rescue, Lloyds exchanged one type of debt, permanent interest bearing shares (Pibs), for another, enhanced capital notes (ECNs). The ECNs paid high interest rates (7.5%-16%), but could be turned into shares if necessary to boost the bank’s capital.

However, at those interest rates, they were also expensive to service. So when it turned out that Lloyds no longer needed the bonds as part of its capital reserve in order to pass a regulatory “stress test”, it requested permission to buy them back at face value – which it argued was allowed under the terms of issue. That in turn would save the bank about £1bn in interest payments over the next five years.

This didn’t go down well with investors – many of them pensioners who had expected the ECNs to mature between 2019 and 2029 and were enjoying the income. Investors challenged the moveand in June the High Court ruled against the bank, arguing that the trigger to exchange the notes hadn’t been met. However, this was overturned last week, when the Court of Appeal unanimously backed the bank.

It’s easy to understand why bondholders aren’t happy. Lloyds admitted it had made an error in the original drafting of the ECNs’ terms and conditions. However, as Jonathan Guthrie puts it in the Financial Times, while the clause “was sloppily drafted… there is little doubt that its central requirement was met”. So while unpopular, the latest ruling is entirely legal. And retail investors won’t be out of pocket as such – they’ve lost anticipated returns, but not their investment.

Of course, from a PR point of view, it’s ugly for Lloyds, especially given that it’s still part-owned by the taxpayer. But given the standards of behaviour people have come to expect from banks, it’s perhaps unsurprising that potential reputational damage is apparently of littleconcern to Lloyds. The biggest lesson here is arguably the oldest one in markets – if an investment offers a higher-than-usual return, there has to be a risk attached.In this case, as Guthrie notes, “the corollary of fat returns from the notes was potential early redemption”.

The other lesson? If you’re looking for a guaranteed source of income in retirement, nothing will replace an annuity. That’s not to say that you should necessarily get one – but if you choose to fund your retirement via drawdown, then you must have a plan in place to cope with the odd unexpected disappointment.

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