RSA Insurance cautions pension liabilities could affect break-up

RSA Insurance's multibillion-pound pensions liabilities are putting the insurer off a break-up as it could be forced to hand over a large share of sale proceeds to staff retirement schemes, its chief executive Stephen Hester has said.

The former Royal Bank of Scotland chief, hired a year ago to lead a turnround, told analysts and investors last week that pension trustees may demand "many hundreds of millions of pounds", and possibly billions, were RSA to sell off big chunks of its operations.

In remarks that demonstrate how swelling pension liabilities are constraining corporate activity at some of Britain's biggest companies, Mr Hester said: "It's an amount that we think disfigures the full break-up strategy."

Pensions experts and analysts said the scale of the liabilities would also discourage buyers from launching a takeover bid for the insurer, which is trying to recover from profit warnings and whose results last week disappointed investors.

RSA, whose staff retirement schemes have 46,200 UK members, is one of a small number of FTSE 100 companies whose pension liabilities are greater than its market capitalisation. By the end of last year they had reached £7.6bn, 75 per cent more than its equity market value of £4.36bn. "This is not far off a pension scheme with a sideline in insurance," said Eamonn Flanagan, analyst at Shore Capital.

Mr Hester's comments about the liabilities at a City presentation last week shed further light on why he has avoided selling chunky assets, such as its Scandinavia division, to bolster the insurer's balance sheet.

In the past year, he has launched a £775m rights issue and disposed of businesses from China to the Baltics, expected to fetch another £800m.

But Alex Hutton-Mills, managing director at Lincoln Pensions, the advisers, said: "If they do a break-up, the schemes are going to be concerned that the strength of the business supporting them might be diminished, and they might seek mitigation in the form of a cash contribution."

Mr Hester pointed to the sale by engineering company Invensys of its rail division two years ago for £1.7bn, of which £625m went to the retirement scheme, as an example of "a pretty good dollar that went to the pension plan". "The risk is they [the trustees] demand the capital anyway - and you are left in the worst of all worlds," he said.

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According to a study by JLT Employee Benefits last September, RSA was one of six FTSE 100 companies whose pension liabilities were larger than its equity market value.

However, RSA highlighted it was also in the "top 10 in terms of highest allocation to bonds (a proxy for low risk profile) and in top third in terms of funding level".

After Mr Hester's presentation RSA added: "The key reason we don't think the group should be broken up is that we believe that the current shape and diversification of the group provides a superior alternative for shareholders."

It added: "The group and trustees have an agreed funding plan in place to eliminate the funding deficits by 2022 . . . We remain committed to ensuring that all members receive their pensions and there is already expected to be enough money set aside in the schemes to do this.

"We continue to make significant contributions to further increase the security of members' benefits."

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