CFOs more open to longevity swaps than pension trustees: Hymans

Chief Financial Officers (CFOs) and pension trustees have divergent attitudes when it comes to de-risking company pension schemes, with CFOs more willing to reduce longevity risks than trustees understand, according to research from Hymans Robertson.

Independent pensions consultancy firm Hymans Robertson has released details of a recent survey it commissioned YouGov to conduct, aimed at CFOs of large UK companies that have defined benefit (DB) pension schemes in place.

Interestingly, results from the survey reveal that CFOs are far more open to longevity swaps, risk transfer and reinsurance arrangements in order to reduce longevity exposure within their DB pension schemes, than trustees of the schemes.

The utilisation of longevity hedging mechanisms, such as swaps and reinsurance, has been increasing in recent years, a trend that is expected to continue in 2016 and beyond as pension funds and schemes look to pass on some of their longevity exposure to the re/insurance markets.

At the same time, insurers and reinsurers have shown strong willingness to assume longevity risk, particularly if they can assume some mortality exposure as a counterbalance, contributing to the expectation at the beginning of the year that more than £20 billion of longevity hedges were expected in 2016.

“Our survey findings indicate that CFOs are perhaps more open to considering a variety of de-risking options than trustees may realise. Solving the DB pensions problem is an issue at the forefront of CFOs’ minds. Over a quarter (27%) say having a clear understanding of scheme risks and knowing when to de-risk is a key challenge,” said Jon Hatchett, Head of Corporate Consulting at Hymans Robertson.

One in seven of the CFOs surveyed said that DB pension scheme exposures were among the biggest risks to their business in 2016, with more than 29% of CFOs targeting an insurance buy-out as the end goal of their DB pension schemes, explains Hymans Robertson.

In contrast, just 15% of trustees revealed a desire to achieve the same goal, underlining distinctly diverse attitudes to any potential de-risking of pension schemes between trustees of the DB pension programs and company CFOs.

The group of CFOs also appear much more willing to begin working towards a buy-out in the near-term, with 63% of CFOs prepared to start the process this year, compared with just 9% of trustees.

Further highlighting the varied attitudes of CFOs and trustees, the report reveals that 78% of trustees actually ruled out a longevity swap in the next year, with only 25% of CFOs sharing the same view.

“With one in seven CFOs considering their DB scheme to be one of the biggest risks to their business this year, it’s no surprise that solving the DB pensions problem is a key priority for CFOs. Brexit has only exacerbated the challenges most schemes face. The high profile pension problems at BHS, Halcrow and Tata Steel are raising this up the agenda and putting pressure on the industry to fund solutions,” said Hatchett.

Pension funds, annuity providers and companies with DB pension schemes are increasingly looking to offload longevity exposures in an effort to mitigate the impacts of people living longer.

The reinsurance market remains overcapitalised as traditional and alternative capital providers continue to flood the sector and losses remain benign.

This abundance of capacity, combined with the willingness of re/insurers to assume longevity risks, and the growing desire of CFOs to de-risk their DB schemes, suggests there’s an opportunity for firms to embark on more efficient longevity risk transfer, swaps and longevity reinsurance transactions, which should be welcomed news to the more willing CFOs.

However, and as highlighted by the report, it’s important that CFOs and trustees align their interests as the scope for collaboration is clear, and a working relationship and strategy regarding a firm’s DB pension scheme could provide ample risk transfer opportunities that perhaps trustees are unaware of.

“It seems there is a great opportunity for trustees and CFOs to collaborate, bringing their range of skills and perspectives to the table. While their objectives may differ, with a primary focus on members’ benefits and shareholder value respectively, they have a common interest in a pension scheme that remains affordable for the business that sponsors it. Developing an agreed plan to meet that objective is in everyone’s interests,” says the report.

The potential for companies in the UK and elsewhere to de-risk their DB pension schemes in an efficient and effective manner, via longevity reinsurance transactions and similar is clear, as is the desire of CFOs to de-risk.

“Many DB schemes are tackling unwieldy deficits. For many trustees and CFOs, buyout may feel a long way off. Just one in five CFOs feel in a position to transfer risk now. But the good news is there are plenty of ways to chip away at DB liabilities whilst progressing towards the ultimate goal of buy-out. By taking slices of risk out of schemes through transactions like buy-ins and longevity swaps, schemes can become more resilient to risk,” said Hatchett.

You can read about many recent longevity swaps and longevity reinsurance transactions in our Directory here.