ARMS TRADE-Battle to avoid defence pensions crisis

(Reuters correspondents worldwide are looking this week at how recession and changing threats are affecting the global arms trade. For highlights, please double-click on [ID:nARMS])

* British group seals groundbreaking pension deal

* Markets downturn, longer life expectancy strain pensions

* Taxpayers could foot part of bill with dearer weapons

By John Bowker and Cecilia Valente

LONDON, June 9 (Reuters) - Raymond Duguid was just an ordinary teenager when he started work as a plumber on Britain's navy fleet, but two decades later his unenviable task is to help the British arms industry defuse a pensions time-bomb.

The 41-year-old docker at Rosyth in Scotland is a union-appointed pension trustee at UK defence engineer Babcock International (BAB.L), which has had to pull off a complex swap deal to hedge the risk of members living longer than expected.

The move is typical of action being drawn up by defence companies around the world, notably in the United States and Britain, to address a problem worsened by the financial crisis -- just as recession also threatens global cuts in arms spending.

Many firms are bracing themselves for billions of dollars in extra pension costs as fund deficits balloon and employees live longer, potentially damaging the balance sheet.

Babcock's unprecedented financial swap involved hedging 500 million pounds ($802.3 million) of liabilities triggered by longer life expectancies with Credit Suisse (CSGN.VX).

"(Babcock's) swap helped reassure the market and the trustees but employees are worried about the future," Duguid said, adding an attempt by the company to reduce benefits two years ago remains fresh in workers' minds.

"If you speak to the employees in the dockyard, they do not trust the company, because of the changes they tried to implement two years ago. They are wary about what Babcock might try to implement," he said.

Hit by the markets meltdown in 2008, defined benefit pension schemes, which promise members a fixed pension independently of the market conditions, have seen funding positions deteriorate.

The defence sector, largely made up of relatively old and in some cases ex-state owned firms, has been hit especially hard -- delivering a knock-on effect to the share price.

Britain's FTSE aerospace and defence index .FTNMX2710 has underperformed the broader market by some 7 percent since the start of the year, weighed also by a slump in airline demand.