RSA announces next stage of UK defined benefit pension schemes de-risking

14th Jul 2009 12:18

RSA announces next stage of UK defined benefit pension schemes de-risking

RSA Insurance Group plc (RSA) and its UK pension schemes' Trustees today announce that they have taken significant action to reduce the schemes' exposure to longevity and market risk. This has been achieved by insuring £1.9bn of the schemes' liabilities with Goldman Sachs1. This action covers around one third of the Group's total UK pension schemes' liabilities, representing over 55% of the liabilities relating to pensions in payment2.

In recent years, RSA, working in conjunction with the pension Trustees, has taken significant action to de-risk its UK pension schemes, including:

Closing the defined benefit schemes to new members and introducing employee contributions, Closing out all final salary liabilities for past service and moving to career-average revalued earnings (CARE) for future service, Hedging market exposure via an extensive programme of interest rate and inflation swaps, and In 2007, reducing equity exposure from 46% to 24% by selling approximately £900m of equities.

These actions have contributed to the strong position and high quality investment portfolio of the UK schemes, enabling RSA and the UK pension Trustees to implement this next stage of de-risking.

This transaction with Goldman Sachs International and Rothesay Life allows the UK 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. This has been secured without a change in the risk profile of the schemes' assets. The schemes retain legal ownership of the assets, which remain invested in a high quality, low risk portfolio of UK Gilts and other UK Government guaranteed bonds. This transaction is similar to a bulk purchase buy-in annuity contract but with significantly enhanced security.

The benefits of this arrangement for RSA and its UK pension schemes are:

For the Company:

It provides an exact match of cashflows for over 55% of the pensions in payment, eliminating any associated longevity, inflation and interest rate risk This protection removes the risk of increased cash funding for these obligations It protects RSA's balance sheet and capital positions by reducing the volatility of the pension position to movements in corporate bond spreads, longevity and inflation risk

For the UK pension schemes:

The exact match of cashflows eliminates any associated longevity, inflation and interest rate risk on over 55% of the pensions in payment It mitigates the sponsor covenant risk while retaining a very strong security arrangement

In accordance with IFRS, the transaction has no impact on Group earnings in 2009 but is expected to generate a small profit from 2010. The transaction will eliminate the IAS19 pension surplus included within shareholders' funds.

Andy Haste, Group CEO of RSA, commented:

"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. This transaction further de-risks the impact of the UK pension schemes on the Group's results and balance sheet."

Steve Broughton and Keith Greenfield, Trustee chairmen of the main UK pension schemes, added:

"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."

-ENDS

For further information:

Analysts

Press

Claire Cordell

Jon Sellors

Tel: +44 (0) 20 7111 7212

Tel: +44 (0) 20 7111 7047

Suzannah Seddon

Simon Kutner

Tel: +44 (0) 20 7111 7140

Tel: +44 (0) 20 7111 7327

Notes to editors:

1. RSA's main UK pension schemes have entered into fully collateralised asset swap and longevity insurance contracts with Goldman Sachs International and Rothesay Life Limited, an FSA regulated life insurer and subsidiary of Goldman Sachs covering a portion of the liability to pay future pensions.

2. The £1.9bn of liabilities covered by the insurance arrangement represents the value on a funding basis. Under IFRS the present value of the liabilities covered by the insurance arrangement is discounted at the AA corporate bond yield as required under IAS19 and is £1.3bn. As at 31 March 2009, the present value of the UK defined benefit obligations under IAS19 was £4.0bn. Following the completion of this transaction the proforma present value of the obligations not covered by the insurance arrangement as at 31 March was £2.7bn.

3. The proforma IAS19 position for the UK schemes as at 31 March 2009 reduces from a surplus of £288m to a deficit of £73m, driven by the difference between the AA corporate bond yield used in accordance with IFRS and the gilt discount rate used to value the insured liabilities for the transaction.

4. The transaction utilises standard collateralised ISDA swap contracts with Goldman Sachs International and full collateral arrangements between the schemes and Rothesay Life.

5. The schemes retain full ownership of the underlying assets.

6. The transaction materially reduces the sensitivity of the Group's balance sheet. The following table sets out the impact of the key sensitivities on the Group's pension scheme net assets under IAS19 (post tax).

Market Movement

Reduction in volatility

Reduction in corporate bond spreads

Down 50%

Increase in longevity

Down 33%

Increase in inflation

Down 33%

Fall in equity markets

(no change)

7. RSA was advised by Towers Perrin and Slaughter and May. Goldman Sachs International and Rothesay Life were advised by Freshfields Bruckhaus Deringer. The pension schemes were advised by Hewitt Associates, Watson Wyatt, Sackers & Partners and DLA Piper.

About RSA

With an almost 300 year heritage, RSA is one of the world's leading multinational quoted insurance groups. It has the capability to write business in over 130 countries, with major operations in the UK, Scandinavia, Canada, Ireland, Asia and the Middle East and Latin America. Focusing on general insurance, it has around 22,000 employees and, in 2008, its net written premiums were £6.5bn.

Important Disclaimer

This press release may contain "forward-looking statements" (as defined in the US Private Securities Litigation Reform Act of 1995) with respect to certain of the Company's plans and its current goals and expectations relating to its future financial condition, performance and results. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which are beyond the Company's control, including amongst other things, UK domestic and global economic business conditions, market-related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities, the impact of competition, inflation, deflation, the timing impact and other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation and other regulations in the jurisdictions in which the Company and its affiliates operate. As a result, the Company's actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in the Company's forward-looking statements. The Company undertakes no obligation to update any forward-looking statements, save in respect of any requirement under applicable law or regulation. Nothing in this press release shall be construed as a profit forecast.

Copyright Business Wire 2009

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