Zurich Assurance and French reinsurance firm SCOR have collaborated to help a pension fund of Swedish construction firm Skanska to a £300 million longevity hedge, featuring a streamlined longevity swap backed by reinsurance capacity.
The longevity risk transfer deal saw pension provider Zurich Assurance providing a longevity swap covering £300 million of liabilities for the Skanska pension fund trustee, the Skanska Construction Services Trustee Limited.
The longevity hedge was structured as a “whole of life” insurance policy, to protect the pension fund against the risk of rising costs as a result of current pensioners living longer than expected. The longevity hedge was arranged on a “named life” basis, covering around 1,000 named pensioners and future dependants.
SCOR has taken on 75% of the risk from this longevity swap, providing reinsurance to take on the risk as the deal was completed. Zurich has itself retained the other 25%.
It’s the sixth streamlined longevity swap transaction that Zurich has carried in the last 18 months, helping smaller pension funds to offload longevity risk which takes the total pension liabilities hedged to almost £1.5 billion.
Jim Sykes, CEO of Zurich Assurance, commented; “There has never been more uncertainty about the direction of travel for mortality rates.
“Despite recent reports suggesting life expectancy is not improving as quickly as had previously been envisaged, we are continuing to see strong demand from smaller-sized pension schemes who want to cost-effectively manage liabilities arising from longevity risk.
“With more than £1.5billion of transactions completed in the last 18 months, we’re expecting demand to continue growing, and look forward to meeting the market’s needs in this area.”
Harvey Francis, the Chairman of the pension fund Trustee, added; “The Trustee is pleased to take this opportunity to hedge longevity risk for its pensioners and their dependents. This transaction helps to improve the security of benefits for all members by removing the uncertainty of future costs to the Fund arising from existing pensioners living longer than forecast.
“It also provides the added comfort of an established platform through which the Trustee is able to hedge this risk. Mercer has done an excellent job in advising the Trustee and sourcing this de-risking opportunity. It has helped to deliver an attractive outcome for the Fund.”
Mercer acted as the lead adviser to the Trustee on this longevity hedge transaction.
Suthan Rajagopalan, lead transaction adviser and Head of Longevity Reinsurance at Mercer, said; “This is the sixth streamlined longevity swap executed in about eighteen months since the first such deal was announced in December 2015. This marks the second deal, on the platform set up by Mercer, where SCOR has been awarded the reinsurance and follows on from the first deal with SCOR announced in January 2017. Before these six transactions which are approaching a total of £1.5 billion, named life longevity hedges were exclusive to only the largest schemes with over £500m of pensioner liabilities and deal sizes averaged £2bn.
“These deals pave the way to competitive longevity reinsurance pricing for small and medium sized schemes which are more exposed to so-called “concentration risk” where there is potential for greater variability in members’ life expectancy due to diverse pension amounts. Mercer’s co-ordination of the project culminated in immediate reinsurance by Zurich with SCOR to minimise the longevity risk transfer cost for the Trustees.”
Warren Singer, Principal at Mercer and Scheme Actuary for the Fund, also said; “The Trustee had been looking at ways to manage risk in the Fund without impacting the long term investment journey plan. The opportunity to hedge the longevity risk in the Fund as part of a wider risk management package agreed with the Company alongside the triennial valuation was compelling. In addition, the longevity hedge transfers this risk, without requiring the payment of an upfront premium. This allows the pension fund to retain full investment flexibility, a key consideration for the Trustee.”
“Competition and appetite in the longevity reinsurance market is strong and there are attractive deals for pension funds to secure,” concluded Rajagopalan. “The demand for streamlined longevity hedges and also traditional insurance structures is being driven by risk management needs and there continues to be innovation to increase the range and efficiency of options to manage longevity risk. These include ‘captive’ or ‘pass-through’ structures for larger schemes – all of which aim to reduce costs and increase flexibility where scale supports this.”
Read about many historical longevity swap and reinsurance transactions in our Longevity Risk Transfer Deal Directory.
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