Rate Cut Stalls Direct Line ‎Pension Plot

One of Britain's biggest insurance companies has abandoned plans to offload a chunk of its pension liabilities as deficits soar in the wake of this month's Bank of England interest rate cut.

Sky News has learnt that‎ Direct Line Group, whose brands also include Churchill and Green Flag, was in talks to hand over part of its defined benefit retirement scheme to an external investor until June's referendum on the UK's membership of the European Union.

In recent weeks, however, executives at Direct Line (Other OTC: DIISD - news) have concluded that the costs of pursuing the transaction outweighed the potential benefits - partly because of the depressive impact that lower-for-longer interest rates are having on gilt yields, the assets used to calculate pension deficits.

Specialist insurers such as Pension Insurance Corporation and Rothesay Life have built substantial businesses over the last decade by taking on the risk of meeting corporate pension schemes' payment obligations to members.

At Direct Line, the pensions in question were part of a defined benefit scheme dating back to when the company was wholly owned by Royal Bank of Scotland (LSE: RBS.L - news) (RBS).

The general insurance group was floated by RBS after the European Commission ordered its sale in the wake of the bank's £45.5bn taxpayer rescue in 2008.

It has performed strongly as an independent company, with profits this month comfortably beating City forecasts.

Sources close to the discussions confirmed that the Brexit vote, subsequent market volatility and monetary policy decisions had had an impact on the decision by Direct Line to abort its discussions.

News (Other OTC: NWSAL - news) of the Direct Line talks comes just weeks after research by Hymans Robertson suggested that UK pension deficits had hit a record £935bn.

The travails facing many employers have been thrown into sharp focus by the crises at BHS, the collapsed high street retailer, and Tata Steel (BSE: TATASTEEL.BO - news) , where ministers have been seeking to pave the way for a rescue of its UK operations.

Baroness Altmann, who recently stepped down as the Pensions Minister, has called for an inquiry to address the longer-term crisis facing companies as they try to plug their pension scheme deficits.

A Direct Line spokeswoman declined to comment.