Pippa Stephens and David Rowley look at the lessons learned by the ITV scheme from its £1.7bn longevity swap deal
Pricing, flexibility, security, track record and commitment are vital when deciding on a longevity swap provider, according to the chairman of the ITV pension scheme, Graham Parrott.
The broadcaster's scheme agreed a £1.7bn swap of its longevity liabilities with investment bank Credit Suisse in August. This removed an important risk, the lifespan of its members, from its future costs.
The deal has left the ITV scheme with more assurance over the future cost of providing benefits to its members.
Due to the size of any longevity swap deal and the timeframe involved, scheme managers must be sure of the commitment and flexibility – especially in advising – of any provider, be it an investment bank or insurance company, Parrott said. Security in the deal wis vital, too, due to the amount of money involved.
Parrott said: "Sturdy collateral arrangements are important – so if anything does go amiss, you’ve got the collateral to protect you".
Collateral refers to assets posted either by the ITV pension scheme or the counterparty, based on the amount of money going from one to the other at any one time.
Firm collateral arrangements would also stand any defined benefit scheme in good stead in looking to derisk in this way, reducing the impact on member benefits of unforeseen shifts in scheme liabilities.
Parrott also advised scheme managers looking to follow suit to ensure good scheme governance was in place – in particular, that data was cleansed efficiently, with specific and accurate records of all scheme members.
“Longevity swaps will be more likely done by bigger schemes rather than smaller schemes. They’re big, complex deals and if you’re taking about 12,000 pensioners – you need a significant number to make it worthwhile,” Parrott said.
Sackers partner Ian Cormican represented the trustees of the ITV pension scheme in the deal, which is expected to increase ITV’s pension scheme’s deficit by £50m. The swap protects the employer should members of its defined benefit scheme live longer than expected.
Cormican said in a statement: "Longevity swaps continue to appeal to both sponsoring employers and trustees as a way of mitigating risk.
"In agreeing this significant swap and implementing the associated collateral and governance arrangements, the ITV Pension Scheme Trustee has taken a concrete step towards enhancing the security of members’ benefits."
History of the deal
Over a course of several months, Parrott discussed various derisking strategies with the scheme’s finance director. Having agreed on a longevity swap as the best option to derisk, they discussed it with their advisers and finally began transaction negotiations with up to eight initial providers.
The deal, completed with Credit Suisse last month, also followed 18 months of derisking preparations including implementing enhanced transfer values, pension increase changes and pension increase gaps.
The swap was one of the first of its kind to be completed with an investment bank, although Parrott stressed this choice was purely based on the five criteria set out above, irrespective of the nature of the provider.
“You need to decide what issues are important to you and look at what providers can provide and do a score card. If an insurer comes at the top of the list, go with an insurer, but if an investment bank does, go with them,” he said.
ITV is the third large company to complete such a deal, which involves the broadcaster paying a fixed monthly sum to the bank and the Credit Suisse in return paying an amount matching the retired staff's benefits into the pension fund.
The total valuation of ITV's pension deficit is currently £312m. It has extended the term of a previously-agreed funding deal where revenues from its digital subsidiary SDN are paid into the pension scheme, to offset the addition to its deficit.
As part of a wider derisking strategy, the scheme has also concentrated on diversifying the investment portfolio and number of fund managers used, doubling the latter to 28 during 2009 and 2010.
