The FINANCIAL -- Mercer has announced that the smallest ever “named life” longevity hedge has been agreed between an undisclosed UK pension plan and Zurich Assurance. The deal is the fourth of its kind since Mercer announced the first ever streamlined deal in 2015 to help smaller pension schemes manage the financial risk of their members living longer.
The hedge, structured as a “whole of life” insurance policy, will hedge against the risk of rising costs as a result of the current pensioners of the pension plan living longer than expected. The hedge is “named life” meaning it covers around 90 named pensioners and future dependants. The total liability for these members is just above £50m. Over six months, Mercer acted as the lead advisor on the transaction, covering all aspects including feasibility, provider selection, accessing reinsurance capacity, structuring, contractual terms and implementation as part of a streamlined longevity hedge platform. Zurich worked with Mercer and Pacific Life Re to establish a set of streamlined processes for operating an arrangement of this size, according to Mercer.
Suthan Rajagopalan, lead transaction adviser and Head of Longevity Reinsurance at Mercer, commented, “This is the smallest ever named life longevity hedge at around £50m and follows on from the two streamlined longevity hedges completed by the Pirelli pension funds in August 2016 and also the previous smallest longevity hedge of around £90m in December 2015. Before these four transactions which total circa £750m, named life longevity hedges were exclusive to only the largest schemes with over £400m of pensioner liabilities and deal sizes averaged £2bn.
“These deals pave the way to competitive longevity reinsurance pricing for small and medium sized schemes which are more exposed to so-called “concentration risk” where there is greater variability in members’ life expectancy due to diverse pension amounts in smaller populations. Our co-ordination of the project culminated in immediate reinsurance by Zurich with Pacific Life Re to minimise the longevity risk transfer cost for the Trustees. This has never been achieved before for a deal of £50m pensioner liabilities.”
The Chairman of the Trustees, Iain Urquhart of BESTrustees said “The pension plan had already decided that a bulk annuity was not desirable in the short to medium term and the Trustees are pleased to seize this early opportunity to hedge longevity risk for its pensioners and their dependants. This transaction helps to improve the security of benefits for all members by removing the uncertainty of future costs to the plan arising from existing pensioners living longer than forecast. We retain our ability to manage our investments to meet the pension plan’s future liabilities and flexibility for further de-risking. Mercer has done an excellent job in advising the Trustees and sourcing this de-risking opportunity and delivered an attractive outcome for the pension plan, efficiently and professionally in just six months from concept to execution.”
Jim Sykes, Zurich’s Chief Operations Officer, said: “We are delighted to announce this transaction, which is the smallest of its kind completed in the market to date. The cost and complexity of carrying out a longevity hedge has typically precluded smaller schemes from de-risking in the past. This latest transaction shows how the streamlined solution can really make longevity risk hedging accessible to even the smallest pension schemes. The deal, coming shortly after our two transactions with Pirelli totalling £600m, reaffirms Zurich’s appetite to write business across a diverse size range within this market.”
Alastair Walker, Principal at Mercer and Scheme Actuary for the pension plan, added, “While trustees have been concerned for some time about their scheme’s exposure to the financial risk of pensioners living longer than expected, that risk has increased due to the current low bond yields; in fact it has more than doubled compared with 10 years ago. The provision of a longevity hedge transfers this risk out of the scheme but because it’s unfunded, the scheme doesn’t pay any premium up front. This allows the pension plan to retain full investment flexibility, a key consideration for the Trustees.”
“In addition to the continued use of streamlined longevity hedges and also traditional insurance structures, there continues to be innovation to increase the range and efficiency of options to manage longevity risk,” said Mr Rajagopalan. “These include ‘captive’ or ‘pass-through’ structures for larger schemes – all of which aim to reduce costs and increase flexibility where scale supports this.”