AXA in £2.8bn longevity swap with Reinsurance Group of America

The AXA UK pension scheme has entered into a £2.8 billion longevity swap transaction, transferring the risk that members live longer than expected to Reinsurance Group of America (RGA Re), and covering around half the closed schemes total liabilities.

The transaction, transferring the longevity related exposure of approximately 11,000 members of the final salary pension scheme to reinsurance firm RGA Re, is designed to stop the deficit faced by the AXA UK pension fund growing any further.

Chairman of the Axa UK Pension Trustees Stephen Yandle commented on the deal; “I am delighted to announce that the AXA UK Group Pension Scheme has taken an important step to ensure that our DB scheme members’ benefits are strongly secured against continuous improvements in life expectancy.

“By significantly de-risking the scheme, this will benefit all our DB scheme members and will not affect any payments to members as they will continue to receive their pension as normal. This is a very positive step in providing additional security of members’ pensions.”

As a result of the transaction, which sees the AXA pension scheme paying RGA Re a premium for the reinsurer to take on the longevity risk associated with the 11,000 member plans, there will be no impact to pension payments.

AXA accessed the reinsurance capacity offered by RGA Re using its own insurance vehicle, following the trend for making longevity risk transfer more efficient and cost-effective, enabling sponsors to access reinsurance markets with less intermediaries.

Emma Ferris, AXA’s UK Director of Pensions, commented; “AXA UK is pleased to have worked with the Trustee’s directors’ in the delivery of this transaction, which demonstrates the company’s commitment to pro-actively manage its risks.

“We’ve leveraged our own internal expertise, and worked hard with the Trustees, the advisors and RGA to develop an innovative solution which provides Scheme members with additional security, as well as improving the risk management and capital position of AXA UK.”

Cormac Galvin, Vice President at RGA UK, said; “RGA is delighted to support AXA in reducing risks within their pension obligations through this transaction. As a global leader in the underwriting of mortality and longevity risks, RGA remains committed to supporting insurers in managing risks inherent in longevity portfolios.”

“RGA’s deep biometric expertise, investment capabilities, and experience in structuring asset and financial risks enable us to develop broad, holistic solutions that reinforce our valued business partners’ continued growth and profitability,” added John Laughlin, EVP for Global Financial Solutions at RGA.

Charles Cowling, Director at JLT Employee Benefits, told the Telegraph who reported on this deal last night here; “We will see the number of longevity swap deals increase significantly. An insurer taking on the liabilities of a pension fund is a weight off the mind of many corporates.

“Rising deficits and liabilities are a major drag on the sponsoring company of a scheme and we’re beginning to see their impacts being reflected in share prices. A proactive approach to reducing pension risk is now a well-established route for companies and BT, Aviva and Scottish Power have all been recent high profile examples of this type of transaction.”

Shelly Beard, Senior Consultant at Towers Watson, who advised on the longevity swap said; “The longevity hedge significantly reduces risk within the pension scheme, providing increased security to members and more certainty to AXA. Towers Watson was delighted to help the Trustees and AXA negotiate an attractively-priced contract.

“Last year’s four major longevity transactions (for BT, MNOPF, Aviva and Scottish Power) covered £25bn of pension liabilities between them. This is the first to be completed in 2015 but several more deals are expected – reinsurers are reporting strong pipelines and pricing competitively.

“Two features of this transaction help explain why there is so much interest in hedging longevity risk right now. First, the progress that the scheme had made in de-risking its assets made longevity a more significant unhedged risk – more and more schemes are finding themselves in this position. Second, the scheme was able to reduce the cost of hedging by accessing the reinsurance market through an insurer owned by AXA. Obviously, not all sponsors will be insurers, but trustee-owned insurance vehicles can deliver similar reductions in cost and complexity, making longevity hedging an option for more schemes”

Reinsurance Group of America was recently involved in a €12 billion index-based longevity swap with Delta Lloyd’s pension fund.

View details of longevity swaps and risk transfer transactions in our longevity swap, reinsurance and risk transfer deal directory.