Battle to avoid defense pensions crisis

LONDON (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 defense engineer Babcock International, 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 defense 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.

"(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 defense 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 defense index has underperformed the broader market by some 7 percent since the start of the year, weighed also by a slump in airline demand.

DWINDLING PERKS

Chicago-based Boeing, owner of a $40.6 billion pension scheme and a $8.4 billion deficit, is taking action to keep pledges to the 550,000 people affected.

The company contributes $500 million a year.

A spokesman blamed Boeing's pension deficit on "decades with a relatively large population of unionized employees," adding that attempts to change the system were dropped last year as the company battled with striking workers.

US contractor Lockheed Martin says pension expenses will top $1 billion in 2009, double the 2008 level.

BAE Systems, Europe's largest defense contractor tracing its roots back to the 1940s, saw its total deficit more than double to 4.2 billion pounds ($6.74 billion) during 2008.

It acted by putting 399 million pounds into the fund last year and says it expects to make similar contributions in 2009, on top of an extra 200 million pounds into UK pension schemes and $250 million to the US pension schemes.

Its stock has underperformed the FTSE-100 index by around 10 percent since the start of the year.

"BAE's pension deficit is not a concern to me at all -- it has never featured on my worry list. There are others that are ten times worse, British Airways for one - and the Royal Mail," says Howard Wheeldon, senior strategist and defense specialist at BGC stockbrokers.

Still, the firestorm in financial markets has left some workers concerned about their retirement plans.

"We are just hopeful things will settle down and as we go forward the scheme will be able to provide pensions," said Mark Allen, 51, a staff negotiator in the BAE pension scheme.

Ian Carr, a 57-year old who has just taken voluntary redundancy from his aerodynamics job for BAE in Brough, northern England, says perks are dwindling for workers younger than him.

"I've always assumed that the pension scheme will cover everything ... Those schemes have got less and less generous, but are still a lot better than a lot of people have," he said.

Analysts expect companies to develop more ways to protect both employees and shareholders from pension costs, including passing them onto the customer.

In defense, that suggests taxpayers paying part of the bill.

"If BAE sits down to discuss with the government the building of the next tranche of Astute submarines, the negotiated price can take account of higher pensions costs," said Nick Cunningham.

"This means that only a relatively small part of the pension deficit liability is with the equity holders -- the taxpayer will pay for it through government contracts," he said.

(Editing by Jason Neely)