Pension longevity risk transfer market to see record in 2014: Aon Hewitt

Aon Hewitt, the retirement product unit of insurance and reinsurance broker Aon, highlights the growing pension risk settlement and longevity risk transfer market in its latest report, saying that overall the market is already at a record level in 2014.

The market Aon Hewitt is referring to comprises largely bulk annuity type deals and longevity swaps. Often the risk is placed with a global reinsurance company, or panel of reinsurers, at the end of the deal. So far in 2014 Aon Hewitt has recorded over £29 billion of pension risk transfer and longevity swaps in 2014, already a record year, a number it expects to grow considerably.

The buy-in side of the market has been dominated by large deals, with three pensioner buy-ins representing 75% of the business placed in the first half of 2014, £3bn and £600m annuities for AkzoNobel’s ICI scheme (with L&G and Prudential respectively) in Q1 and a £1.6bn annuity for Total in Q2 (with PIC).

Interestingly, Aon Hewitt highlights Prudential’s increased appetite for writing this kind of longevity re/insurance business. Prudential has itself already written over £1bn of business already this year, which Aon Hewitt says reflects a significant increase in bulk market appetite at the insurer. Aon Hewitt believes this is an example of the increasing focus of multi-line insurance groups on the bulk market, following the significant drop in demand for individual annuities and it expects other insurers will follow suit.

The largest longevity swap transaction seen to date took place in July this year, which alone could help the market to a record level of activity in 2014. The BT Pension Scheme created its own insurance company which it ceded the risk to, then the Prudential Insurance Co of America effectively reinsured 25% of the scheme’s total exposure, or £16bn of the scheme’s liabilities. Aon Hewitt advised BT plc on this landmark deal.

Aon Hewitt believes that by the end of this year we could see much smaller longevity swap transactions being undertaken, opening this important market to smaller pension schemes, as the size barriers continue to fade.

There is ample longevity reinsurance capacity to soak up these transactions, currently without requiring the assistance of the capital markets, with around 20 large global insurers or reinsurers displaying strong appetites to assume longevity risks, which is resulting in substantial price competition according to Aon Hewitt.

The third-quarter of 2014 will become a record quarter for the longevity risk transfer and pension derisking market, thanks to the huge BT deal. With over £29 billion of these pension risk transfer and longevity swap deals already completed in 2014 this will be a record year. How big a record is set remains to be seen and deal-flow and discussions remains active according to our sources. At least one more large longevity swap is expected in the next few months and reinsurers are understood to be preparing more capacity to participate in some smaller transactions as well.

View our list of longevity swap and risk transfer transactions.