James Moore: It'll be tough to make RSA deal add up

Outlook Royal & Sun Alliance was crowing to other insurers yesterday after it claimed to have "eliminated" the risk from 55 per cent of its final salary pension scheme with the aid of a deal with Rothesay Life, a pension buyout company. These beasts were very much in vogue a couple of years back, when it seemed that every unemployed life insurance executive and investment banker on the block was trying to join the party.

Their pitch was that they would effectively take the increasing risks of running final salary pension schemes off the hands of companies in return for large premiums, and then do all sorts of frightfully clever "financial engineering" to make themselves an even larger profit while still ensuring the company's pensioners were taken care off.

Then the downturn happened and the deals dried up as the cost of doing them rocketed, along with pension scheme deficits.

So what makes RSA different? Well, the company has been working hard at "de-risking" its pension scheme for some time now. It is closed to new members and those who are still members have been told they have to make contributions, where previously RSA provided the funding. Some £900m of risky equities have also been sold in favour of bonds. So it is, perhaps, in a rather healthier state than many other schemes which are usually discussed at the end of board meetings when the company vodka is brought to the table. Maybe a deal to remove the remaining risks to RSA of staff living too long, or interest rates moving the wrong way, is viable.

The worry, however, is that it is virtually impossible to see exactly how the risk has been "eliminated", despite yesterday's announcement (which was a masterpiece of opacity from the industry that wrote the handbook on it). The clever chaps who did the deal say they took advantage of the shape of the gilts market to sell off a package of short- and medium-dated bonds while buying longer-dated bonds that yield more and cover RSA's liabilities.

Rothesay gets the short-dated bonds and a monthly (undisclosed) premium that RSA says will be paid for out of the long-dated gilts. The only risk is to Rothesay, if people start living longer than its mortality tables suggest they will. Win-win situations really do exist, says the company, and this is one of them. The trouble is if it sounds too good to be true it usually is, particularly in financial services.

It is also worth noting who owns Rothesay Life. The company is a subsidiary of Goldman Sachs, the investment bank which yesterday shrugged off the down turn to report a $3bn profit. In the words of a one senior pensions consultant: "I'm not sure what to make of it, but what I can say is that it's a fair bet that there will be tens of millions in it for them."