Mercer, Zurich in longevity hedge solution for smaller pension schemes

Mercer, the pensions, investments and employee benefits firm and Zurich the global insurance company have teamed up to launch a streamlined longevity hedging solution for small to mid size UK pension schemes with pensioner liabilities of £50m+.

The longevity hedging market has long been the domain of huge longevity swaps, the most recent example being the £16 billion BT longevity swap from a couple of weeks ago, or straight buy-in and annuity backed solutions. The market has an appetite and the solutions in place to support smaller longevity swaps and hedges, something that is very attractive to smaller defined benefit pension schemes with risk to offload.

The new solution launched today by Mercer and Zurich is unique, the firms say, in that it offers an effective way to enter a longevity hedge to smaller pension schemes. The solution forms part of Mercer’s SmartDB solutions for defined benefit pension schemes, offering bespoke de-risking and fiduciary services.

Mercer said that the SmartDB launch today opens the longevity hedging market to smaller pension schemes with a more streamlined offering than has been seen before. By bringing scale and operational efficiency to longevity hedging, Mercer hopes to attract smaller schemes to enter into de-risking contracts with a panel of reinsurers which are fronted by Zurich.

“Demand for DB de-risking solutions is increasing,” commented Alan Baker, Mercer’s UK Head of DB Risk, “Combining longevity hedging with our successful fiduciary management service, this is an innovative, practical step opening up a cost-effective DB de-risking approach to schemes of all sizes. It’s a lower risk, higher return solution compared to alternatives like a pensioner buy-in. We have pre-agreed hedging terms with a panel of reinsurers fronted by Zurich, to allow clients access to the best prices because getting them competitive deals is crucial. It’s unique and we’re delighted to offer it in partnership with such a well-known global insurer.”

In the past the longevity swap and hedging market was so customised and bespoke to the pension scheme that deals under £1 billion were uneconomical. The high transaction costs of entering into a longevity hedge meant that insurers and reinsurers wouldn’t even quote for a smaller deal, knowing that the cost would be prohibitive.

That is changing with the introduction of more standardised deal terms, structures and the ability for pension schemes to either establish their own fronting insurer, or use a facility with fronting, such as the one being launched by Mercer and Zurich.

Simon Foster, Head of Corporate Life and Pensions, UK and International Savings at Zurich, added; “We are delighted to be working with Mercer and our reinsurance partners to bring this solution to smaller and mid-size DB schemes, for which longevity hedges were not previously easily available.

“DB pensions have been facing significant funding challenges in recent years from people living longer and uncertain economic conditions. As a result, most have closed to new members, and many have stopped future accrual, with the focus now moving to stabilise existing liabilities. Given the clear market need, and Zurich’s strategic focus on providing innovative solutions for corporate customers to better manage their risks, this is a natural extension to our UK proposition.”

Dan Melley, UK Head of Fiduciary Management at Mercer, explained; “Most organisations are faced with two options: manage the risk on the balance sheet or transfer it in full, with a significant premium cost. Whilst each option will rightly have its place with many companies, our SmartDB solution provides a third way. Organisations of all sizes can now access a more complete hedging and governance solution, eliminating many of the risks at more manageable cost. Extending our capabilities to include a longevity hedge will greatly assist our clients as they seek to manage the risks of their DB liabilities.”

The Streamline Longevity Solution from Mercer and Zurich features a standardised implementation process, access to the pre-selected panel of major reinsurers through the partnership with Zurich, access to the Financial Services Compensation Scheme and as a result competitive pricing, they say.

Mercer sees it as an alternative to the buy-in and buy-out for these smaller pension schemes, allowing them to avoid the premium costs of annuities and to reduce their risks immediately on entering into the agreement.

The reinsurance companies participating in the panel will likely be the usual suspects, the large, diverse reinsurers who have shown a strong appetite to continue assuming longevity risks. A longevity hedging facility such as this will provide the reinsurers with a pipeline of smaller deals, which may in the end be more easily assumed than the very large swap deals.

The launch of initiatives such as SmartDB show that the market for longevity risk transfer solutions is maturing, with participants listening to the potential sponsors of deals and responding by bringing solutions which are more efficient and cost-effective for these smaller pension plans.

View our list of longevity swap and risk transfer transactions.