SSE pension hedges £1.2bn longevity risk in novel combined transaction

Two defined benefit pension schemes of SSE plc, a FTSE 100 energy company, have entered into a novel combined transaction that enabled £1.2 billion of longevity risk to be hedged using both buy-in and insurance, with longevity risk also directly passed to reinsurance providers.

Specialist actuarial and advisory firm Hymans Robertson designed and led the transaction, which helped SSE reduce its exposure to longevity risks within the two pension schemes using two separate buy-ins and an £800 million longevity insurance arrangement.

Pension Insurance Corporation (PIC) was the counterparty for the buy-ins, that totalled £350m, covering around £250m of pensioner liabilities in the Scottish Hydro-Electric Pension Scheme (SHEPS) and around £100m of pensioner liabilities in the Scotia Gas Networks Pension Scheme (SGNPS).

Legal & General then provided the £800 million of longevity risk insurance for the SHEPS pension fund, which was the first transaction to use L&G’s “UK-based pass through” structure to transfer longevity risk directly to the end reinsurance provider.

The SHEPS scheme becomes the first to have combined a buy-in and a longevity insurance arrangement to hedge its longevity risk. It’s also the first to use the direct pass through to transfer the longevity risk directly to reinsurance.

Hymans Robertson said it expects other pensions will look to emulate this blueprint approach, which allows the risk transfer to be tailored to pension schemes’ individual needs.

The actuarial firm said that both participating pension schemes recognised significant cost savings on the buy-in transactions by getting quotations from insurers for both schemes at the same time, increasing transactional efficiencies and benefitting from particularly competitive pricing as a result.

Both transactions were completed within three weeks of selecting an insurer, with one of the transactions being completed within two weeks, and by combining the three arrangements alongside the direct access to reinsurance via L&G the pensions benefit from material improvements in their funding positions, reducing risk and enhancing security for their members.

Graham Laughland, Chair of trustees for the Scottish Hydro-Electric Pension Scheme, commented on the deal; “I am delighted to have taken this positive step in reducing risk and improving the security of members’ benefits. Hymans Robertson’s and CMS’ advice and specialist experience in the buy-in and longevity insurance market were invaluable. Through their efficiency and tailored approach the Scheme was able to save money at each stage of the process. Club Vita’s market leading longevity analytics gave the trustees great confidence in assessing both the value of the transactions and the amount of longevity risk that has been successfully removed from the Scheme. I also want to thank the team at PIC, who have been proactive in forging a strong relationship with the Scheme and have shown a focus on customer service.”

Tony Fettiplace, Chair of trustees for the Scotia Gas Networks Pension Scheme, also said; “This deal is great news for the Scheme. Reducing risk over time is an absolute priority for us and it is important to do this in the most cost effective way. Hymans Robertson’s proposal to work collaboratively with the Scottish Hydro Electric Pension Scheme worked very well to the ultimate benefit of both schemes. We are delighted to complete this buy-in with PIC, who were flexible and innovative in helping the Scheme follow this collaborative approach and achieve our aims.”

Richard Wellard, lead advisor and partner at Hymans Robertson, added; “It was very rewarding to work with both sets of trustees and to design a package of transactions that delivered such an excellent deal. All parties have been able to achieve their objectives and SSE plc joins the increasing number of FTSE 100 companies who have reduced longevity risk exposure in their pension schemes. We take pride in our ability to save our clients’ money and execute transactions efficiently and effectively. Over 90% of the transactions we take to market complete versus an industry average of around 50% and this gives our clients and insurers an extra layer of confidence in the projects we are running.”

Tristan Walker-Buckton at PIC, commented; “This was a well thought through transaction and we thoroughly enjoyed working with the respective trustees and their advisors to reach a solution which best met their mutual de-risking needs.

Working closely with Hymans and CMS, the trustees were able to move from a decision to go ahead to signing the contract in one of the shortest periods that we have seen. This is an excellent example of how those pension schemes that are well prepared and well advised can achieve excellent outcomes in the bulk annuity market.”

James Parker at CMS who provided legal advice to the trustees, explained; “We were very pleased to advise both sets of trustees on these transactions. Together with Hymans, our market-leading longevity team were able to bring specialist market knowledge and experience to facilitate a series of incredibly swift and unique longevity risk transfer transactions.”

Chris DeMarco at Legal & General, stated; “We were delighted to work with the trustees and their advisors to deliver an innovative solution to the scheme. Our UK-based, longevity pass-through offering enabled the trustees to manage down this risk, while allowing them to benefit from cost efficiencies through our economies of scale and giving them the peace of mind that we will support them well into the future. We thoroughly enjoyed working with all parties and look forward to further supporting the trustees and helping them secure and protect their members’ benefits.”

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