RSA protects itself against pensions risk

ROYAL &amp; Sun Alliance (RSA) yesterday insured itself against potential increases in the cost of funding one third of its staff pensions scheme.<br /><br />The insurance deal, arranged by investment bank Goldman Sachs subsidiary Rothesay Life, is set to deliver a &ldquo;small&rdquo; earnings boost from 2010, but will have no impact on earnings this year, RSA said. Transaction costs were not disclosed.<br /><br />RSA, best known for its &ldquo;More Than&rdquo; motor and home insurance business, said the move would eliminate the risk of increased cash funding on &pound;1.9bn of its pension liabilities.<br /><br />This action covers around one third of the group&rsquo;s total UK pension scheme liabilities and over 55 per cent of the liabilities relating to pensioners currently receiving payments.<br /><br />Andy Haste, RSA&rsquo;s chief executive, said: &ldquo;We are pleased to have worked with the trustees to deliver a strong solution, which takes advantage of market conditions. Following the action taken in previous years, the schemes were strongly positioned to achieve this next step with such solid security.&rdquo;<br /><br />Under the terms of the policy, RSA retains ownership of the funds&rsquo; assets, which are invested in a low-risk portfolio of gilts and government bonds.<br /><br />RSA says the deal is similar to a bulk purchase buy-in annuity contract but with &ldquo;significantly enhanced security&rdquo;. Buy-in contracts transfer pension liabilities from a company to a specialist insurer.<br /><br />Rothesay Life said the deal &ldquo;is structured as an insurance contract covering the liabilities, under which the trustees retain ownership of the assets, comprising gilts and UK government guaranteed bonds. This arrangement provides a high degree of security for the schemes.&rdquo;<br /><br />&ldquo;This transaction further de-risks the impact of the UK pension schemes on the group&rsquo;s results and balance sheet,&rdquo; said Haste.<br /><br />The latest move follows other measures designed to cut risk, such as closing its defined benefit schemes to new members and introducing employee contributions.