RSA Insured Against Pension Risks by Goldman Sachs

RSA Insurance Group plc said it and its U.K. pension schemes' trustees have "taken significant action" to reduce the schemes' exposure to longevity and market risks by insuring against those risks.

A 1.9 billion pound (2.2 billion euro) insurance arrangement with Goldman Sachs insurers about one-third of RSA's total U.K. pension scheme liabilities, representing more than 55% of the liabilities related to pensions in payment, said RSA. The insurance is in the form of fully collateralized swap and longevity insurance contracts with Goldman Sachs International and Rothesay Life Ltd., a life insurance and subsidiary of Goldman Sachs. It covers a portion of the liability to pay future pensions.

Steve Broughton and Keith Greenfield, chairmen of the group's two main U.K. pension schemes, said in a statement that "both trustee boards support this transaction to protect a substantial proportion of the liabilities against future longevity improvements and mitigate the sponsor covenant risk while retaining a very strong security arrangement. This action is consistent with our fundamental objective of ensuring the schemes are able to meet their long-term obligations."

"The transaction...allows the U.K. schemes to take advantage of market conditions to enhance returns and so eliminate inflation, interest rate and longevity risk on around one-third of the schemes' liabilities," said RSA in a statement.

The insurer added that the transaction doesn't change the risk profile of the schemes' assets. The schemes also retain ownership of the assets, which are invested in a high quality, low risk portfolio of U.K. gilts and other U.K. government guaranteed bonds.

"This transaction is similar to a bulk purchase buy-in annuity contract but with significantly enhanced security," said RSA.

RSA said the deal helps it by providing an exact match of cash flows for more than 55% of the pensions in payment, eliminating any associated longevity, inflation and interest rate risk. It also removes the risk of increased cash funding for the pension obligations and protects RSA's balance sheet and capital positions by reducing volatility related to movements in corporate bond spreads, longevity and inflation risk.

The group said that with the transaction, the schemes' exposure to volatility in the form of a reduction in corporate bond spreads is cut by 50%. Volatility caused by increases in longevity or inflation will be cut by 33% each.

According to RSA, it and its pensions trustees had taken "significant action" to de-risk the U.K. pension schemes in recent years. Among these, the insurer closed defined benefit schemes to new members and introduced employee contributions. It also closed out all final salary liabilities for past service and moved to career-average revalued earnings for future service.

RSA also hedged market exposure through interest rate and inflation swaps, and in 2007, reduced equity exposure from 46% o 24% by selling about 900 million pounds of equities.

(By David Pilla, international editor, BestWeek: [email protected])