Capital market-based longevity swaps to close in 2012

Instead of reinsurers backing the deals, which cover only members below the age of 55, this will be done by private investors, as the longevity is sold in packaged bonds on the capital market.

This has never been done with pension scheme liabilities before, although the Royal Mail scheme is believed to have been close to such a transaction before the government agreed to buy up its assets and liabilities last year.

Aviva completed a similar transaction with some of its life insurance longevity in 2009.

The complexity of the arrangements, especially the need to create the bonds, means neither deal is likely to complete until around the end of the year.

James Mullins, partner at Hymans Robertson, said: “These deals are a very good idea for schemes looking to get the risk of younger members off their books, cheaply.

“Reinsurance companies generally won’t buy into the risk of under-55s longevity because they don’t have accurate enough data on them to make it a safe investment. But the banks clearly have a larger risk appetite.”

He also claimed the way the banks package these deals mean they are cheaper but less bespoke – but this doesn’t matter for schemes because it is much more difficult to predict the life expectancy of under-55s.

Meanwhile, JPMorgan saw its pricing for buyouts and buy-ins rise to an unprecedented 180% of liabilities last year, reaching the record high in December, from 140% in January 2011.