The Airways Pension Scheme, one of the two defined benefit schemes sponsored by British Airways, has signed a £1.3bn longevity insurance contract with Rothesay Life.

The life insurer originally provided insurance in June 2010 for some 20 per cent of the pensions in payment, but the insurance contract announced today increases the longevity risk cover to 40 per cent.

Airways Pension Scheme chairman of the trustees Paul Spencer said: "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."

According to Towers Watson, this contract is part of a recent surge in pension risk transfer activity. Senior consultant Colette Christiansen, who advised the Airways Pension Scheme trustees on this agreement, said: "This is the fourth time in as many months that a large UK scheme has hedged risks relating to £1 billion or more of pension liabilities. At the same time, we are helping an increasing number of smaller schemes to purchase insurance through deals that are often executed quickly and with no fanfare. In the past week alone we have helped clients complete three relatively small bulk annuity transactions, with more expected before the year end."

Pension trustees and sponsoring employers are increasingly focused on how they can best reduce risk in their schemes and enable a smooth transition towards a long-term goal of being self-sufficient or buying out the scheme, the consultancy said.

Christiansen added: "Transactions which remove longevity risk can be key staging posts on these journeys. In addition, because pension schemes are now budgeting for higher life expectancy, the cost of insurance looks more affordable. Employers and trustees are well aware of how unanticipated improvements in life expectancy could require more cash from the sponsor and most would be happy to remove this risk if the price is right. However, the long-term nature of these deals makes security a central consideration when contracts are negotiated."

Share Story: