Small schemes find longevity possibility

Under the terms of the deal, which involves JP Morgan’s Life Metrics derivative product, £100m of deferred member assets will be hedged out for an as yet unnamed scheme.

Because of its non-bespoke nature, the product is considerably cheaper than a full longevity swap and is aimed at offering smaller schemes an affordable alternative.

Life Metrics is an index based on UK Office of National Statistics figures, although equivalents for other countries also exist, which enable clients to transfer longevity risk attached to their business. Launched in 2007, it is currently used by insurers and reinsurers, but has never yet been bought by a pension scheme.

JP Morgan life and pensions chief Guy Coughlan called the product “a comprehensive set of tools and capabilities aimed at managing longevity risk”, using “effective hedging solutions involving derivatives and structured products”. But the investment bank declined to comment on the forthcoming deal.

Consultants have been expecting the first pension scheme index-linked longevity swap “for a while now”, according to Hewitt Associates principal and derisking specialist Martin Bird.

“We have been waiting to see a pension scheme to transact one of these solutions; it was only a matter of time,” he said.

 “The focus so far has been on heavily tailored deals at the high end of the market, but I think we will see more use of index solutions, especially for deferred members.

Meanwhile Hymans Roberston derisking consultant James Mullins claimed deals like this would be better able to pass risk on to the capital markets. “It is easier for the markets to understand and trade,” he said.