Longevity swap outlook positive, but capacity could be limited in 2018: Mercer

The outlook for longevity swap market activity in 2018 is positive, according to consultancy and pension risk specialist Mercer, but there can be no guarantees on the availability of reinsurance capacity to support transactions, with competition expected to be high.

Mercer says that it expects 2018 to be a bumper year for defined benefit pension risk transfer in the United Kingdom and beyond, but the consultancy urges pension plan sponsors to move forwards in their risk transfer planning or risk being left behind.

“For many schemes, market conditions are favourable for pension risk transfer and insurer and reinsurer capacity will be tested,” Mercer explains.

Longevity swaps are just one component of the pension risk transfer and reinsurance market, but Mercer believes the segment will be worth watching in 2018.

2017 saw a smaller number of longevity swap transactions than were completed in 2016, but the volume of liabilities transferred through these deals was actually higher.

As a result, Mercer says that for longevity swaps, “the outlook for 2018 is positive.”

However, pension plan sponsors may want to get their skates on, Mercer suggests, as the increased interest in de-risking defined benefit pension plans in the UK and elsewhere could take its toll on the amount of reinsurance capacity available for such deals.

Annuity transactions alone totaled almost £30 billion in 2017, but Mercer expects that 2018 will break all previous records and be the busiest year on a global scale.

“It is quite possible that upwards of £50BN of global risk transfer activity will take place this year, once longevity swaps and member options programmes are also taken into account,” explained Andrew Ward, Head of Risk Transfer Consulting at Mercer.

As a result, the amount of reinsurance support needed for pension risk transfer transactions will increase, potentially limiting its availability.

Hence, Mercer advises pensions that are considering risk transfer, “Be it a bulk annuity, a longevity swap or a member options programme – is to start preparing as soon as possible.”

“To maximise insurer engagement and drive competitive pricing in 2018, schemes should ensure that they provide a clear rationale for the transaction with clean data, aligned stakeholders and a well thought through governance structure. It should also be borne in mind that this is increasingly a global marketplace,” commented Ward, “and reinsurers, and increasingly some insurers, now operate internationally. Competition for reinsurer capacity is now also well-established from pension plans in North America.”

Should reinsurance capacity for longevity risk appear drained, perhaps we could see some sponsors looking to the capital markets again.

A number of ILS fund managers do invest in longevity risk related transactions, through their life ILS strategies. If the structure can be made appealing, there are plenty of options to transfer longevity risks to the capital markets, thus opening up a much larger pool of reinsurance capacity.

Fellow consultancy Hymans Robertson also said that it expects 2018 will be a record breaking year for pension and longevity risk transfer.

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