BT pension scheme in record £16 billion longevity swap transaction

The largest longevity swap transaction ever seen has been announced this morning, with the UK’s BT Plc (telecommunications company) offloading a huge £16 billion of its longevity exposures through a longevity swap transaction.

The size of the deal demonstrates the exposure that some of the world’s largest pension schemes have to longevity risks, as well as the appetite that insurers and reinsurers have to assume longevity.

The BT Pension Scheme Trustee announced that it has entered into longevity insurance and reinsurance arrangements to protect it against costs associated with pensioner longevity, or potential increases in life expectancy.

The arrangements cover more than 25% of the pension schemes total exposure to improvements in longevity, covering a huge £16 billion of its liabilities. BT expects the longevity insurance policy will provide long-term protection and income to its pension scheme in the event that members live longer than currently expected.

Interestingly the transaction has been structured with BT establishing its own insurer, allowing it to offload the risk directly without transferring it via an investment bank which has been the case in other deals. Other transactions then see the bank enter into the longevity swap with insurers and reinsurers.

BT set up this wholly owned insurance company and the pension scheme trustee transferred the longevity risk to this insurer, which in turn reinsured this longevity risk with The Prudential Insurance Company of America, the U.S. based life insurance company, by entering into a longevity swap.

By establishing its own insurance vehicle BT could access global insurance and reinsurance market capacity directly allowing it to save on transaction costs.

Paul Spencer, Chairman of the Trustee commented; “This transaction has taken many months of hard work by the Scheme’s executive team. This is a ground breaking deal in terms of size, structure and with one of the leading life insurance companies in the United States providing reinsurance. But more than this, the Trustee is delighted with a transaction that significantly reduces risk and provides enhanced security for members.”

The longevity insurance policy forms part of the pension schemes investment portfolio, said BT, adding that no additional contributions will need to made in future.

Aon Hewitt said that it advised BT Plc on the £16 billion longevity swap transaction carried out by the BT Pension Scheme, noting that the deal has a number of unique features as a result of its record size.

Martin Bird, senior partner and head of Risk Settlement at Aon Hewitt, commented; “This transaction is the largest single UK pension de-risking deal to date and represents another step forward in terms of innovation. Together with recent large buy-in transactions for ICI and Total, the BT longevity swap underlines the continued focus on pensions de-risking and demonstrates that the market is open to the ‘mega-funds’.”

We wrote recently about these developments which mean that size is no longer a barrier to longevity swaps and risk transfer deals. With pension funds keen to offload longevity risk to the reinsurance markets we could see many more of these large deals over time.

“As pension schemes continue to focus on reaching a position of stability there is significant demand for such large scale capacity – and we are seeing a rapid response from the provider market with a number of new solutions available. This includes the use of captive structures which enable even the very large schemes to make risk settlement secure and affordable on such a scale,” added Bird.

Matt Wilmington, partner at Aon Hewitt, said; “We have been talking for a number of months about the increasing capacity and appetite of the global reinsurance market to take on pension fund longevity risk. Transactions like this and Total’s buy-in, where all of the longevity risk was immediately reinsured, serve to underline the scale of capacity available. 2014 has already been a record year for risk settlement transaction volume and we expect a number of further transactions to add to the growing list of those completed”

Clearly the insurance and reinsurance markets appetite for longevity risk is not yet waning. It’s unclear whether Prudential is holding all of this risk or whether some has been reinsured, perhaps retrocessionally, out to the global market players. At some point, deals of this size will soak up available reinsurance capacity and perhaps then the focus will return to finding capital market risk transfer solutions for longevity risk.

View our list of longevity swap and risk transfer transactions.

Also read:

– Size barriers fading in longevity risk transfer: Aon Hewitt.

– Q1 2014 saw highest level of longevity swaps & pension risk transfers.

– Longevity risk transfer market to boom, experts forecast.

– Reinsurers driving longevity risk transfer market pricing & capacity.

– Longevity swap deal sizes expected to grow: Towers Watson.