British Airways (BA) is on the verge of striking a landmark deal to insure more than £4bn of its historic pension liabilities, underlining blue-chip companies’ accelerating efforts to reassure investors about their vast financial obligations to former workers.
Sky News has learnt that the trustees of the BA-sponsored Airways Pension Scheme (APS) are close to a pension buy-in deal with Legal & General (LSE: LGEN.L – news) , one of the largest players in the Pension Risk Transfer industry.
Talks are understood to have been ongoing for months, and sources close to BA said they could be concluded within days.
If successfully completed, the £4.4bn deal would be the largest such transaction ever seen in the UK, according to industry sources.
It would mark a significant step for BA in its efforts to exert a grip on its vast retirement obligations, built up over decades thanks to historically generous pension promises to employees.
The APS, which closed in the 1980s, has approximately 24,000 members, of whom only 200 still work for BA, according to a spokesman for the airline.
It has over £8bn in assets, meaning that the buy-in transaction would account for roughly 60% of the scheme.
A deal would also represent another giant stride by L&G into the sector as it competes with rivals such as Pension Insurance Corporation, Rothesay Life, Aviva (Other OTC: AIVAF – news) and Scottish Widows.
In its most recent financial results, L&G said it had more than £7bn-worth of PRT deals in exclusivity, with the APS scheme understood to account for the majority of that figure.
Pension buy-ins are typically structured by trustees securing a bulk annuity contract from an insurance company.
The insurer then agrees to pay to the trustees specific benefits to all or a proportion of a scheme’s members and eligible dependants for the rest of their lives.
BA has been battling for years to shed its reputation as a giant pension scheme with an airline attached, and under Willie Walsh, the chief executive of parent company International Airlines Group, it has seen its financial fortunes revived.
The company is, however, fighting on numerous other fronts, most notably in trying to salvage its reputation after the payment details of hundreds of thousands of customers were stolen last week.
Alex Cruz, the chief executive of BA, has apologised and promised to compensate affected passengers, but has ducked questions about whether he will quit over the hack.
BA has already embarked on other efforts to trim its pensions bill, announcing earlier this year that it would introduce a new company-wide retirement plan that it promised would deliver “a significant upgrade” to more than half its workforce.
It has closed its New Airways Pension Scheme to future accrual and its British Airways Retirement Plan to future contributions.
The company has some of the largest pension obligations in corporate Britain, with almost £24bn of assets in the two previous schemes at the end of last year.
Most final salary, or defined benefit, pension schemes have been closed by blue-chip companies during the last 20 years as they have wrestled with yawning deficits.
The APS had already been the subject of a reinsurance agreement struck last year to protect BA against the prospect of members surviving longer than the funds set aside to pay their pensions.
In July, the Court of Appeal overturned a ruling in favour of the APS trustees that they could amend the scheme’s rules to allow them to grant discretionary increases to retired members.
BA makes deficit repair contributions to the APS of about £55m a year.
Spokesmen for the APS trustees, BA and L&G all declined to comment on Wednesday night.
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