Airline British Airways has managed to offload £1.3 billion of longevity risk through what they called a ‘longevity swap, under an insurance contract’, with Rothesay Life. In June 2010 the same two parties completed a similar transaction for £1.3 billion, which at the time was said to cover 20% of the British Airways schemes pensions in payment. This latest transaction means that British Airways have now managed to hedge the longevity risk associated with 40% of their Airways Pension Scheme’s (APS) pensioner liabilities.
This longevity swap transaction involves the APS scheme making fixed payments to Rothesay Life and in return they receive fixed payments from Rothesay Life Limited reflecting the pensions payable to surviving pensioners. If longevity improvements are better than assumed in the scheme’s payments then the scheme receives the difference from Rothesay Life. If longevity falls then the difference will be in favour of Rothesay Life although the scheme’s liabilities will also fall.
Keith Satchell, Chairman of Rothesay Life, said; “We are very pleased that we have been able to work with the Trustees again to insure additional benefits against increasing life expectancy. We believe this extension further demonstrates Rothesay Life’s expertise in designing and executing solutions. This is the second repeat trade for Rothesay this year, which we believe is a real endorsement of the team.”
Paul Spencer, Chairman of the Trustees of the Airways Pension Scheme, commented; “One of our principal objectives is to make members’ pensions more secure. Most of our investments aim to produce an income that closely matches the pensions we expect to pay, but this still leaves the risk that longevity could improve faster than we have budgeted for. We identified an opportunity to further protect the Scheme against some of these extra costs and, after thoroughly reviewing options with our advisers, selected Rothesay Life again based on their ability to structure a contract around our needs.”
Towers Watson and law firm Eversheds advised the pension scheme trustee’s on this deal.