British Airways has struck a £1.3bn deal with Goldman Sachs to insure a fifth of the liabilities of one of its two main final salary pension schemes.
The deal – known as a "pension buy in" affects the Airline Pension Scheme (APS), which has a £1bn funding deficit, rather than the New Airline Pension Scheme, which faces a £2.7bn funding black hole.
It has been struck with Rothesay Life, a subsidiary of Goldman Sachs, which will pay BA's pension scheme an amount equivalent to 20 per cent of its pension liabilities. In return, Rothesay will receive predetermined proceeds from scheme assets, although they will still be owned by APS. The deal is effectively an insurance policy taken out against the cost of increasing longevity of scheme members.
There have been a string of such deals in recent years as pension schemes and their sponsoring employers seek to quantify and lay off the risks they face. However, they have proved controversial in some quarters. Critics have argued that they benefit companies such as Rothesay far more than the actual schemes.
A number of high profile City figures have become involved in pension buy in and pension buy out firms.
In a letter to scheme members, Paul Spencer, who is chairman of trustees at APS, said: "The insurance policy entered into with Rothesay Life Limited will provide protection against the cost of pensioners living longer as well as providing a better match for expected pension cashflows.
"The investment decision process has been lengthy and thorough and a range of product options and providers were considered as well as the price of the policy and any change in the risks to which the scheme would be exposed." Goldman, which faces fraud charges in the US, has done similar deals with Royal & Sun Alliance and Rank.
A former government pension adviser, Ros Altman, said: "This will be part of an effort to better match liabilities and reduce the risk that pension liabilities will grow faster than forecast in the future. However, as the scheme has a large deficit, by committing funds to this kind of insurance arrangement, the opportunity for additional returns will be reduced somewhat, since more money will be tied up in insuring the benefits."Reuse content