AA UK Pension Scheme has completed a £351m bulk annuity deal with Canada Life, set to cover the 2,510 pensioner and dependent members of the scheme.
The deal, completed on 23 August 2018, will deliver a regular income equal to its pension payments for members.
The transaction, revealed in the motor association's half-year results published yesterday, 26 September, is circa £47m more than AA’s defined benefit obligation, a difference which will be recognised on its year-end balance sheet.
AA said: “The annuity is therefore a very precise liability hedging asset that provides an income stream to match future payments. As we expect the premium paid for the annuity to exceed the defined benefit obligation measured as at 31 January 2019, this difference will be recognised as an increase in the balance sheet deficit as at that date.”
According to its half-year report, AA’s pension deficit reduced by £154m to £86m due to increasing discount rates, falling long-term inflationary expectations, changes to demographic assumptions and contributions to the pension schemes.
AA UK recorded a £366m deficit as of its 31 March 2016 triennial valuation, after which it committed to contributions £8m a year from July 2017 to March 2019; £11m between 2019 and 2021 and £13m from 2021 to 2026.
The scheme has both a final salary section and a Career Average Revalued Earnings section, which has been based on the consumer price index from April 2018.
Furthermore, pension service charge changes agreed with trustees resulted in a decrease of £4m in charges.
AA has a second DB scheme, the AA Ireland Pension Scheme, which is closed to new entrants and future accrual.