UK – Royal and Sun Alliance (RSA) and Britannic, have been named as UK insurers exhibiting the most pensions risk, according to a valuation report by Morgan Stanley.

For the first time, Morgan Stanley has decided to take into account the funding position of UK insurer’s own defined benefit pension schemes on an FRS-17 basis in its valuation for the industry. Although FRS-17 has been delayed until 2005, Morgan Stanley says it believes the accounting standard presents the clearest picture of the true economic liabilities that shareholders face.

The US broker estimates the aggregate after-tax deficit for UK insurers to be in the region of 2.8 billion pounds, with Royal & Sun Alliance cited as having the largest problem with its pension scheme funding. Morgan Stanley believes RSA (assuming no asset liability management) would have an after-tax deficit of 1.2 billion pounds on a mark-to-market basis by the end of 2003, which is not reflected in the current stock price.

Britannic is highlighted as being at risk, which, says Morgan Stanley, "although subject to only a modest pension fund deficit at present, is very susceptible to further falls in equity markets because of the high equity weighting in its pension scheme. "

Aviva is also named as being one of the top three most at risk. Legal & General is the firm least at risk, according to the research note.

It is admitted that equity markets could recover strongly and therefore alter the insurers’ funding status, but Morgan Stanley will continue to mark to market the pension scheme as it does with embedded values.

Morgan Stanley already looks at pensions deficits in its valuations of AXA and Zurich Financial Services in Europe.