HBOS yesterday promised to plug a £1.8bn black hole in its pension fund within a decade and revealed that earnings this year are likely to top expectations.
The country's biggest mortgage lender said paying back that deficit made sense because it removed the risk that higher interest rates and inflation could push up its pension liabilities.
HBOS will set aside £1bn at the end of this month to be paid into its workers' retirement fund over the next five years.
James Crosby, HBOS's chief executive, said: "We are going to manage down our pension deficit. It's important to recognise it's a debt. It is entirely prudent to pay down the debt and manage the risk associated with it."
The bank, like many other British companies, saw its pension fund dwindle as stock markets fell between 2000 and 2003. At the same time, life expectancy is soaring. Last week, a study commissioned by the Government recommended that the retirement age should be lifted to 68 from 65 to meet a £57bn pensions shortfall.
Amicus, Britain's biggest private-sector union, welcomed yesterday's commitment. John Nolan, Amicus's national officer, said: "This represents a huge leap forward for HBOS."
At the same time, HBOS confirmed that a promised £1bn share buyback had been largely completed, with the bank having bought for cancellation £910m worth of its own stock so far this year. HBOS also said it would buy back a further £750m worth of shares next year to return cash to shareholders.
HBOS shares advanced 41p to 908p, the best performance by a FTSE 100 company, on news that strong performances from its insurance and investment businesses, and tight cost control, would see earnings top City targets of 84.4p a share this year.
Ian Gordon, a banking analyst at Dresdner Kleinwort Wasserstein, said: "HBOS is yet again set to deliver strong revenue growth, firm cost control and massive jaws, with prudent asset growth, stable margins, improving returns and capital strength." He recommended clients buy the shares to 1025p.
Higher mortgage payments and utility bills have left many Britons struggling to meet repayments, but HBOS's bad debts have only risen in line with lending this year.
The bank, which traditionally lent one in every five UK mortgages, tightened its loan criteria several years ago. It is now responsible for around 15 per cent of new homeloans.
Mr Crosby has been bolstering corporate banking to help offset a slower mortgage market. He remained cautious about the housing market, but predicted that the number of homebuyers and average house prices wouldbe better than expected this year. Next year, the market is expected to be "stable" but unlikely to deliver stellar growth.
HBOS foresees further cuts in interest rates over the next 18 months to encourage spending as the economy picks up. Mr Crosby said: "That does not mean we are bearish on the economy, but we think it will take some time for it to pick up."Reuse content