Babcock International Group, a leading UK based engineering support services company, has enacted a longevity swap to help it hedge the risks of longer life expectancies associated with it’s pension scheme. In doing so it has become the first UK company pension scheme to enter the longevity swap market.
Credit Suisse have acted as the counterparty in this £500m deal. The deal only covers the longevity risks associated with retired workers, so those drawing pensions, and enables Babcock to give itself a financial backstop should those workers (or thier spouses or dependents) live longer and thus draw their pensions for longer. This effectively gives Babcock £500m of cover for any shortfall caused by the risks of longer life expectancy.
Pension funds forecast expected longevity for their members, but as life expectancy increases, the cost of making monthly payments to those retirees whose life expectancy exceeds that forecast increases. This increases costs for pension schemes and can result in shortfalls, which longevity swaps are designed to cover.
Reading the various other news reports on this it seems likely that we could see more deals of this type soon, with one actuarial company claiming to be in discussions with six firms over potential deals. Another has claimed the market could exceed £5b this year, while others discuss the possibility of the UK Government issuing a longevity bond to hedge it’s own state related pension risks. Now that the first deal has been brought to market in the UK, it seems pension funds could help the longevity risks market really take off.