ROLLS-ROYCE yesterday unveiled a deal with its pension trustees to offset the cost of paying out to employees who live longer than expected.
The longevity swap deal will see Deutsche Bank taking on £3bn of the risk associated with the company’s pension.
The world’s second-largest maker of aircraft engines said the agreement would give additional security to all members of the company’s final salary pension scheme whose contributions will not be affected.
An estimated 37,000 pensioners will be covered by the deal.
Rolls-Royce’s finance director Andrew Shilston said: “The contract with Deutsche Bank reduces the risk on approximately £3bn of the fund’s liabilities.
“The cost of this transaction will be borne by the pension fund and will have no material effect on the funding arrangements.
“We have made sure that as our pensioners live longer in retirement we have made proper provision for them.”
The agreement will see Deutsche Bank take the risk in return for receiving the pension contributions beyond a certain age.
The bank was provided with a detailed analysis of the expected longevity of members of the Rolls-Royce pension scheme.
It will also pass some of its risk on the deal to re-insurers.
Some companies have been left with the dilemma of keeping pension schemes running which have become more and more expensive as the population lives longer.
Paul Spencer, the chairman of Rolls-Royce’s pension fund trustees, said: “We have been working closely with Rolls-Royce for some years to enhance the security of all our members’ benefits. This is another important step forward.”
Earlier this month Rolls-Royce, which makes engines for planemakers Airbus and Boeing, also said it had performed well in the third-quarter and expects to deliver strong growth in full-year profit, shrugging off turmoil in financial markets.
ADVISERS: AON HEWITT
Matt Wilmington of Aon Hewitt’s risk settlement team led sensitive negotiations between pension fund trustees, Rolls Royce management and Deutsche Bank.
Advising Rolls-Royce, the company drew up a profile of those in the company’s pension fund and their life expectancy.
The detailed process took a year, with ten staff in total involved in drawing up the complex settlement.
London-based Wilmington, who has been with the company for ten years, also worked on a similar deal between BMW and its pension fund trustees.
“This is a complex process and involves explaining exactly the implications to the trustees.
“Having a bank like Deutsche helped because it is well established. We carried out a lot of research on members of the pension fund to assess the risk.”
He said that companies are increasingly going down the route of offsetting pension fund risk.