UK - British Airways has completed a £1.3bn (€1.57bn) pension buy-in transaction with Rothesay Life that will cover approximately 20% of the pensioner liabilities of its Airways Pension Scheme (APS).

The airline manages two defined benefit (DB) pension funds, the APS and the New Airways Pension Scheme (NAPS), which had a combined deficit in December 2009 of £3.7bn, of which £1bn is attributable to the APS. (See earlier IPE article: BA deficit exceeds €4bn as trustee chair steps down)

It has now confirmed it has agreed an insurance transaction with Rothesay Life, a subsidiary of Goldman Sachs, where the trustees have purchased insurance from Rothesay, but will retain ownership of the assets backing the transaction.

The transaction covers £1.3bn of the liabilities of the APS, approximately 20% of pensioner liabilities, making it the third-largest buy-in deal in the UK, as Rothesay's £1.9bn transaction with two RSA schemes last year involved a gilt swap and longevity insurance rather than the traditional buy-in, and its buy-in with CDC in November 2009 covered £370m of assets. (See earlier IPE articles: Unusual market conditions sparked RSA longevity deal and UK's CDC completes buy-in with Rothesay Life)

Paul Spencer, chairman of the trustees of the APS, said: "The trustees working with their advisers, conducted a thorough market review process and selected Rothesay Life to deliver a bespoke solution to the scheme.

"Our selection was based on the insurer's creativity and structuring abilities, the robustness of the security package underlying the insurance contract and the execution certainty, which gave us the ability to deliver the solution at a pre-agreed price."

Confirmation of the buy-in comes just a week after BA announced it had reached an agreement with trustees of both schemes on a deficit recovery plan ahead of its merger with Iberia.

Under the terms of the deal annual contributions will remain steady at £330m increasing in line with inflation, and BA will provide £250m of additional security of airline assets, while additional deficit contributions will be available if the airline has a year-end cash balance of more than £1.8bn. (See earlier IPE article: British Airways reaches deficit agreement with pension schemes)

In a statement, BA said: "The APS scheme has committed to pay Rothesay Life pre-determined cashflows.

"In exchange, Rothesay Life will make payments to APS matching 20% of the actual pension payments as they arise.

"The insurance transaction provides protection for longevity risk and provides a direct match for the pension cashflows in all inflation and interest rate scenarios. 

"The transaction does not change contributions from British Airways and is consistent with the long-term aims of the scheme to reduce the reliance on the employer over time."

The trustees of the scheme were advised by Towers Watson, with Paul Kitson, senior consultants at the firm, noting: "The Rothesay Life solution delivered an array of innovative security and execution features and fully satisfied our collective requirements for a transaction of this type."

However Charlie Finch, partner at Lane, Clark & Peacock (LCP), said: "The deal between British Airways' pension scheme and Goldman Sachs' insurance company shows the continued appetite for using insurance solutions to reduce pensions risk, following on the back of deals by Aggregate Industries and BMW earlier this year. 

"At £1.3bn, this is the third-largest insurance transaction ever by a UK pension scheme, but is only a small step toward addressing British Airways' pension liabilities, which are over £15bn in total."