Phoenix pension scheme in £900m longevity swap with own insurer

The pension scheme of UK closed life and pension fund consolidator Phoenix Group, has entered into a longevity swap transaction with its own insurer Phoenix Life Limited, simultaneously reinsuring the longevity risk on a quota share basis.

Aon Hewitt announced this morning that it has acted as the lead advisor to the Trustees of the PGL Pension Scheme in their longevity insurance transaction with Phoenix Life Limited. The deal, which Aon Hewitt categorise as a longevity swap, will provide the trustees with additional security for the scheme by hedging the longevity risk associated with £900m of the scheme’s liabilities.

Martin Bird, senior partner and head of the Risk Settlement Group at Aon Hewitt, commented on the transaction; “This transaction highlights the continuing innovation in the longevity risk transfer market – particularly around ways of accessing the reinsurance market. Already this year we have seen the BT deal involving the establishment of an insurance vehicle and the Aviva transaction, where an insurance vehicle owned by the scheme sponsor acted as intermediary between the scheme and the reinsurers.”

With insurer Phoenix Life being part of the Phoenix Group and acting as the intermediary insurer, it makes transacting a longevity swap easier. By using their own insurer Phoenix Group could keep costs down as it transferred the scheme’s longevity risk in respect of its pensioners to Phoenix Life Limited.

As you might expect in a longevity swap with an intermediary insurer, the longevity risk was simultaneously reinsured on a 50% quota share basis. We assume this will have been reinsured with either a single or a panel of global reinsurance firms and further news about who was involved on that side of the deal may become available in days to come.

“We expect to see this innovative thinking being sustained in the market over the coming months, making the abundance of longevity capacity available in the reinsurance market more accessible to a range of schemes both very large and small,” continued Bird.

Matt Wilmington, partner in Aon Hewitt’s Risk Settlement Group, said; “The arrangement was a win-win for trustees and Phoenix Life, reducing risk in the scheme and allowing the insurer to structure its capital arrangements more efficiently. We also expect a number of other insurers who are in a similar position with large defined benefit pension schemes to consider a similar type of arrangement. In this case, the insurance contract formed part of a funding agreement between the scheme and its sponsor which will also allow the scheme to reduce investment risks further by providing enhanced funding.”

CMS Cameron McKenna acted as the lead legal advisor to the trustees. Commenting on the transaction, James Parker, partner at CMS Cameron McKenna, said; “Disintermediation is at the very cutting edge of developments in the longevity market and this transaction is strong evidence of a growing trend. We are delighted to have been able to assist the trustee on this transaction which consolidates CMS’ leading position as a legal advisor in the longevity market.”

View our list of longevity swap and risk transfer transactions.