Carillion improved its governance and data to ensure a good deal on its £1bn longevity swap, as it sought to hedge greater-than-anticipated life expectancy among members of its DB schemes.
More employers and schemes are considering such deals to reduce one of the key risks affecting the cost of their future pension promises, with the AstraZeneca Pension Fund announcing a £2.5bn swap yesterday.
But consultants have warned the costs of these transactions could prove prohibitive, due to a limited number of deals and providers.
The Carillion swap was agreed between provider Deutsche Bank AG and five DB schemes sponsored by the support services company, and will hedge out the rising costs as a result of its pensioners living longer than expected.
The schemes, ranging from £50m to £400m in value, were priced as a single scheme but executed as five separate swap contracts to reduce cost.
“It was a year’s project – we didn’t just go and buy it,” said Robin Ellison, chair of the trustee company Carillion Pension Trustee.
“We did some data cleansing and we did some analysis of whether it was a good deal or not, what other people were offering and timing [and] the performance of the counterparty."
A subcommittee, made up of members mostly from Carillion’s finance team, was set up oversee the deal and listen to pitches made over the year. “The process of doing a deal is painful,” Ellison said.
However, if the terms are right the trustees would consider a similar deal in future, he added.
Getting value
Schemes considering a longevity swap should think about the risks they want to take off the table and what value they want out of the deal, said Kim Nash, client director at PTL.
“For a lot of schemes it’s not appropriate because of the fact it is so expensive,” said Nash.
Schemes with tight risk reduction and governance budgets can consider alternatives such as reviewing their interest and inflation rate risk, she added.
Longevity swaps are also uncommon due to the additional governance needed and a limited number of intermediaries that schemes can transact with, said Paul Kitson, lead adviser to Carillion on the transaction, and partner in PwC’s pension team.
However, this could change, with a number of transactions set to complete at the end of this year or early next.
“A number of funds are thinking about structures that mean you don’t need to go to a bank,” Kitson added.
