Longevity swaps cover £22 billion of liabilities so far in 2014: Aon Hewitt

The longevity swap, longevity reinsurance and pension risk transfer market continues to grow, with £30 billion of pension risk transfers undertaken year-to-date with almost £22 billion of these consisting of longevity swap deals, according to Aon Hewitt.

According to Aon Hewitt, the pensions and retirement product unit of insurance and reinsurance broker Aon, 2014 has so far been a record year for the use of bulk annuity and longevity risk transfer structures, with over £30bn of risk transfer from company pension schemes in 2014.

Aon Hewitt’s UK Risk Settlement market update for November 2014 shows that the use of bulk annuities has already surpassed 2013, reaching £8.5 billion for the year-to-date and with an expectation that £10 billion is still a possibility for 2014.

At the same time the longevity risk transfer market, through longevity swaps and reinsurance deals, has reached almost £22 billion of liabilities covered in deal volume seen in 2014 so far.

Aon Hewitt highlights a few of the key deals seen so far this year, which demonstrate the variety of longevity swap solutions that are available:

• In July, the BT Pension Scheme created its own insurance company, to take on longevity risk and transfer it to the Prudential Insurance Co of America, one of the world’s largest insurance groups, to cover £16bn of liabilities;
• Also in Q3, the Phoenix Group disclosed £900M longevity swap deal, which transferred liabilities to one of its own insurance companies, Phoenix Life Ltd, with 50% of the liabilities then reinsured with RGA;
• Previously, in Q1, Aviva also took on a hands-on approach to addressing longevity risk, acting as the intermediary for a £5bn longevity swap with its own scheme, before passing on risk to Swiss Re, Munich Re and SCOR Global Life.

While these deals all cover the scheme-specifc longevity risks related to the retired members of each sponsor, Aon Hewitt notes that the market in its current state is able to accommodate much more of these deals, at both smaller and larger sizes.

Transactions of £50m or greater will receive wide support, with insurers such as L&G and Abbey Life ready to act as intermediaries to help pension schemes to access risk transfer and reinsurance capital they require. Capacity remains widely available, with a panel of up to 20 global reinsurance firms all willing to provide quotes on any transactions, resulting in substantial price competition.

By quarter, the third-quarter of 2014 has outstripped all others for pension and longevity risk transfer by a big margin. The £16 billion BT Pension Scheme longevity swap has made this quarter the largest in the UK longevity market’s history and will help 2014 on its way to setting records that could be tough to beat.

Longevity swaps and pension risk transfers by quarter - Source: Aon Hewitt

Overall, the UK bulk annuity pension risk transfer and longevity swap and reinsurance market is at record levels in 2014. If we see any more deals before the end of the year that record may become a tough one to beat, thanks to the very large BT longevity swap deal.

How big a record is set remains to be seen, but deal-flow and discussions remains active according to sources. These sources still suggest that at least one more large longevity swap deal is being prepped, but whether it will come to market in  2014 remains to be seen. Reinsurers are understood to continue to have plenty of capacity to support some smaller longevity transactions as well.

View our list of longevity swap and risk transfer transactions.

So far in 2014 we have recorded longevity swap, reinsurance and risk transfer transactions in more currencies than just GBP. Adding up all the 2014 longevity deals we have listed in our directory and converting them using today’s exchange rate gives us a total for 2014 longevity swap, reinsurance and risk transfers of £40.79 billion ($63.88 billion or €51.05 billion).