Rolls-Royce buys £3bn insurance policy to cover pension plan risk

The aero-engine maker Rolls-Royce has agreed a £3bn pension longevity swap with Deutsche Bank, becoming the tenth major pension scheme to do so. The deal covers the 37,000 pensioners in the firm's final salary scheme and offsets the risk of them living longer than expected.

Andrew Shilston, the finance director at Rolls-Royce, said: "We have made sure that as our pensioners live longer in retirement we have made proper provision for them." He said the cost of the transaction will be borne by the pension fund.

Under the terms of the contract, if pensioners live longer than expected Deutsche Bank will offset the additional cost of paying pensions. If the reverse happens, cutting the fund's liabilities, it will make payments to the bank. The market welcomed the news. Shares in Rolls-Royce – which makes engines for airplane firms Airbus and Boeing – climbed 3 per cent to 698.5p.

Rolls-Royce's move is the latest in a growing trend for major firms to turn to pension longevity swaps to help deal with financial risk management. The deal matched the previously largest longevity swap arranged by BMW early in 2010. FTSE 100 firms – including RSA Insurance and engineering support services firm Babcock – have now transferred risks associated with more than £11bn of pension scheme liabilities since 2009.

James Mullins at Hymans Robertson said: "This is a signal that there's more to come. There's a massive appetite out there to tackle pension scheme risk. The deal allows the company to focus more on core business rather than the distraction of having to cope with pension volatility."

He pointed out that Rolls-Royce previously made a £500m contribution to its pension scheme in 2007 to tackle growing investment risk. Yesterday's move aims to cut the financial risk created by longer life expectancy.

Matt Wilmington, principal at Aon Hewitt, which advised Rolls-Royce pension fund trustees, said: "This transaction, along with others completed in the past year or so, underlines a continued focus on pensions risk management and in particular the use of longevity swaps as a key risk management tool for trustees and sponsors."

Ian Cormican, a pensions partner at law firm Sackers, worked on the £1.7bn longevity swap between ITV and Credit Suisse in the summer. He says there will not be a glut of longevity swaps because of their complexity.

"They are very sophisticated transactions," Mr Cormican said. "But they are attractive because they improve security for members' benefits, while taking volatility out of the longevity risk in pension schemes."

Pensions walkout

Workers at the consumer goods giant Unilever have voted to strike in protest at plans to close their final salary pension scheme.

The GMB union said its members based at the company's sites in Warrington, Cheshire and Norwich in Norfolk backed industrial action by three to one. The GMB said the pension change affected 5,000 Unilever staff across the country, adding it will now consult with other trade unions in Unilever to fix dates for strike action, with the first walkout due before Christmas.

National officer Allan Black said: "This strike vote demonstrates that pensions are not just a matter of concern for public sector workers as the concerns are shared by workers in the private sector too."