UK’s PRA seeks to make longevity risk transfer more accessible

The UK Bank of England’s Prudential Regulation Authority (PRA) is proposing changes to the pre-notification requirements for longevity risk transfers and longevity hedging arrangements, which could simplify access to this market for smaller pension schemes.

In addition, the PRA proposes updating the information on the key risks it considers can arise from longevity risk transfers, adding basis risk.

Under the proposed changes, the PRA intends to differentiate between the level of pre-notification expected for a large and/or complex longevity risk transfer transaction, and other simpler, or smaller longevity hedging transactions.

The PRA said that for the larger and more complex transactions it doesn’t propose any changes to how firms engage with them in advance of the deal execution.

But for smaller and simpler longevity risk deals, the PRA proposes streamlining the notification process, by enabling reporting to be completed via a template.

That will reduce the burden on smaller pension schemes when it comes to engagement with the regulator over a possible longevity swap or other risk transfer transaction.

As well as simplifying and standardising the information provided to the PRA for these pensions or firms seeking to enter into a longevity risk transfer transaction, it will also remove the need for the information to be reviewed by the PRA in advance, the regulator said.

The PRA said this will help to reduce costs both for the firms involved and the regulator, while any risks are mitigated by the fact these will typically be smaller and simpler longevity risk transfer arrangements.

In addition, the PRA can use the templated information to decide whether it needs to apply stronger due-diligence on any specific transaction.

On the inclusion of basis risk in firm’s risk assessment documentation prior to a longevity risk transfer, the PRA hopes this will already have been done anyway, given its key place in these transactions.

Basis risk can exist between the underlying annuity and any longevity swap or hedge, particularly where longevity indices may be used.

The PRA has a consultation document out with the market now seeking feedback on its proposals.

Feedback is likely to be positive, particularly on the need for a lighter-touch notification process, as this can assist smaller transactions in getting to market faster and help to bring new, smaller pension schemes into the longevity risk transfer market for the first time, effectively lowering further the barriers to entry.

Longevity swap activity is expected to increase in 2019, which will naturally require more reinsurance capacity to support the deal activity anticipated in the year ahead.

Making it simpler for smaller pensions to access sources of longevity risk transfer can only help to boost transaction levels of activity even further.

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