ITV completes £1.7 billion longevity swap with Credit Suisse

by Artemis on August 22, 2011

ITV plc, a British television broadcaster, has announced that it has entered into a £1.7 billion longevity swap with Credit Suisse to remove the risks associated with increases in pension liabilities due to longer than expected life spans of members of their defined benefit pension scheme. Towers Watson advised the ITV Pension Scheme on the transaction.

Longevity swaps allow pension schemes to offload the risk of pensioners living longer than predicted meaning that any increase in payments required due to pensioners claiming from the pension fund for longer than their projections allowed for are transferred to the swap counterparty and off the pension schemes balance sheet liabilities. Longevity swaps are expected to grow in popularity and use as life expectancy increases in the majority of countries.

Under this longevity swap transaction, ITV’s pension scheme will make fixed payments on a monthly basis to Credit Suisse. In return Credit Suisse will make payments into the defined benefit scheme that broadly match the amount of benefits being paid out. A press release from Towers Watson, adviser to the transaction, says that the transaction covers the benefits of just under 12,000 members and dependents of the scheme. It is the third biggest risk transfer of a UK pension scheme to date.

Paul Kitson, a senior consultant at Towers Watson who advised the Trustee, said: “Typically, pension schemes expect today’s pensioners to live two or three years longer than they budgeted for a decade ago. Longevity swaps allow schemes to make one further adjustment and then nail down what they will be paying out. Because the payments stretch so far into the future, arrangements for posting collateral are essential. A good governance structure is needed to make this work.”

Mark Duke, head of settlement consulting at Towers Watson, said: “Protecting your pension scheme against increasing longevity is attractive for trustees and Finance Directors who are used to seeing life expectancy as a one-way street, with each review bringing additional costs. Also, as schemes take more cautious views about the rate of improvement, the price of buying protection looks better value for money. Recent market turbulence has highlighted the need for pension schemes to have a clear risk management strategy. Knowing what risks to eliminate and when is going to be central the way pension schemes are run.”

Ian Griffiths, ITV’s Group Finance Director, said; “Over the last couple of years, ITV has made significant progress in strengthening its balance sheet and managing its pension risk. This latest initiative is a further significant step in reducing the exposure of our business to legacy pension risk.”

Graham Parrott, Chairman of the Trustee of the ITV Pension Scheme said; “The Trustee has worked closely with ITV over several months and this agreement removes significant risk from the Pension Scheme and so therefore enhances the security of all members’ benefits.”

As another high-profile longevity swap comes to market it is expected that the use of these instruments will increase as pension schemes become more aware of the risks increasing longevity poses.

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