Stars align for pensions as lower longevity reinsurance pricing feeds in: Aon

The stars are aligning for the UK pension fund market, at least for those looking for de-risking solutions, as the pricing on longevity reinsurance capacity finally comes into line with new mortality data and lower-cost capacity looks set to help pensions lay off longevity risk more efficiently.

The longevity swaps, risk transfer and reinsurance market has been on a go-slow due to a period of dislocation as new mortality data on longevity expectations flowed through into global reinsurer pricing.

That took time and it is only now that pricing of longevity reinsurance capacity is said to have come into sync with the latest modelling, which should lower the cost of risk transfer for pensions.

A number of other factors are also expected to drive UK pension fund demand for risk transfer, including bulk annuities which typically require longevity hedging or reinsurance alongside them, according to Aon.

Martin Bird, senior partner and head of Risk Settlement at Aon Hewitt, commented; “This market always has a range of factors which affect the way it operates and particularly the timing of deals. But as we hit the halfway mark in 2017 it’s clear that the ‘stars have aligned’ to make pricing levels look very attractive and we expect a corresponding rise in activity.”

Aon explained that the pension focused insurers who underwrite bulk annuity transactions typically hedge the longevity risk associated with a deal into the reinsurance market.

Now that the latest longevity trends, which suggest that life expectancy improvements have been slowing over the last five years, are now being reflected in reinsurance pricing levels, Aon says, which now should serve to support attractive bulk annuity pricing.

John Baines, partner in Aon Hewitt’s Risk Settlement Group, added; “This is all good news for the risk settlement market – but only if pension schemes are ready to capitalise on opportunities this situation brings. To do this, schemes need to do the groundwork properly, making sure that scheme data is in good order and giving consideration to how a bulk annuity will fit within the scheme’s de-risking plans. They must also have clear decision making and governance processes. They will then need to be patient and wait for the right price to materialise – but armed with the ability to move quickly when the time is right. And increasingly, that time is emerging.”

Read about many historical longevity swap and reinsurance transactions in our Longevity Risk Transfer Deal Directory.