Pension Insurance Corporation helps charity hedge pensioner longevity risk

Pension Insurance Corporation, a UK-based specialist provider of insurance solutions for defined benefit pension funds, has announced the completion of a pension buy-in transaction for UK children’s charity the National Society for the Prevention of Cruelty to Children (NSPCC). The transaction protects the NSPCC pension scheme from risks such as longevity, inflation and investment on £63m of pensioner liabilities.

According to the announcement, the transaction also allows the Trustees of the NSPCC Pension Scheme to defer meeting the cost of deflation, making a material saving on the cost of the premium. This enabled the costs of the transaction to be kept down, making it more affordable for the pension scheme.

David Collinson, co-head of business origination at Pension Insurance Corporation, commented; “We are very pleased to have been able to help the Trustees achieve their goals of insuring the pensioner benefits, whilst leaving aside deflation risk. We see many schemes which would like to insure some or all of their liabilities, but are unable to afford to do so. By shaping the risks which are insured in this way, we are able to make the product more affordable, whilst removing the biggest risks, such as longevity, inflation and investment.”

Steve Delo of PAN Governance, Independent Chair of Trustees for the NSPCC Pension Scheme, said; “We are delighted to have locked down volatility on a significant portion of our liabilities, securing those risks which we deem material. We worked closely with JLT, as our advisors, and PIC, to shape the contract to meet our needs, which meant we were able to save a considerable amount on the premium.  Our advisors were instrumental in helping us source a suitable provider and supported us throughout the negotiation process. The PIC team were positive and flexible in helping us achieve our goals.”

Tiziana Perrella, the JLT consultant who advised the Trustees on the transaction, added; “The Trustees held matching assets which they were able to use to fund a transaction on favourable terms. Advance preparation to identify the most suitable contract structure and an efficient implementation process were crucial in achieving a positive outcome”.

Pension Insurance Corporation is one of the largest insurers of longevity risks and has in the past engaged in longevity reinsurance transactions to pass on the risk it assumes to others more able to bear it. Last year it transferred £300m of longevity risk to Munich Re in July and another £400m in December.

This pipeline of longevity risk is essential to allow insurers such as Pension Corp to continue assuming risk. Reinsurers are able to bear a certain amount of longevity risk, it provides a natural hedge to mortality exposures they also hold, but at some point the longevity risk pipeline will need to expand allowing longevity risks to be more readily transferred on to the capital markets.

Given the potential size of the longevity risk transfer market this is an important segment to watch as it could very quickly become a major source of opportunity for investors willing to assume risk in return for a premium as well as for those involved in structuring and facilitating transactions.