On the go: A £6bn longevity swap by an unnamed UK pension scheme and the Prudential Insurance Company of America suggests that insurers’ appetite for longevity risk has not diminished, despite the uncertainty around the long-term impacts of the Covid-19 pandemic.
The deal, struck between the scheme and the subsidiary of American insurance giant Prudential Financial, is intended to protect the scheme against the risk of pensioner and dependent members living longer than expected.
LCP, Willis Towers Watson and law firm CMS all advised on the transaction, with Zurich acting as an intermediary on a “pass through” basis, and it is thought to be the first time that Prudential Financial has dealt in this kind of structure.
The deal also represents the largest longevity swap intermediated by Zurich, beating the £3bn swap carried out for the BBC last year.
That insurers continue to offer attractive pricing suggests their appetite for UK longevity risk remains unsated.
Records were broken in 2020 where, despite difficulties imposed by the pandemic, the risk settlement market exceeded £54bn, beating 2019’s £52bn, according to figures from Aon.
It was estimated that 2021 would challenge for that record, continuing a trend that should see defined benefit schemes insuring £1tn of liabilities by 2031, according to figures from Hymans Robertson in February, and half of all DB liabilities either paid out or insured by 2030, according to analysis by Mercer.
Myles Pink, partner at LCP, which advised the unnamed corporate sponsor, said the consultancy’s role in the transaction was “to help to ensure that the pricing and terms agreed were consistent with the wider derisking journey plan agreed between the sponsor and trustees”.
“Particularly important for this transaction was to provide clear advice to the sponsor on a longevity hedging transaction being priced and executed during the global pandemic,” he continued, while another sponsor focus was on “ensuring agreement of pragmatic terms and efficient processes for the management of collateral and operation of the longevity swap”.
“Collaborative working with other advisers and stakeholders was key to successfully providing such wide-ranging advice,” Myles said.
Ian Aley, head of transactions at Willis Towers Watson, said: “We helped the joint working group to understand the full breadth of available options for managing longevity risk, which was a material outstanding risk in the scheme.
“We concluded that a longevity swap would provide good value for money relative to the risk transferred, as well as enabling the scheme to continue to run an optimised investment strategy.”
He continued: “More widely, during the first quarter of 2021 Willis Towers Watson led deals covering in excess of £10bn of liabilities, demonstrating the robustness of the longevity derisking markets and that pension scheme trustees are continuing to focus on risk reduction where it is affordable.”
James Parker, pensions partner at CMS, added that the transaction “underlines the remarkable resilience of the longevity risk transfer market”.
