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Busy year for longevity risk transfer expected, says Aon Hewitt


Aon Hewitt have announced that they acted as the lead advisor on the recently closed Pilkington longevity swap transaction, which we wrote about earlier today here. The deal saw UK insurer Legal & General enter into a £1 billion longevity swap with the Pilkington Superannuation Scheme, L&G then offloaded the risk through a longevity reinsurance transaction with Hannover Re. Aon Hewitt suggest that this could be just the start of a bumper year for these types of transactions and they forecast a busy 2012 for longevity risk transfer.

Aon Hewitt say that the deal announced today underlines the renewed focus on longevity risk management, a trend seen growing last year, and they see a high likelihood of a very active risk settlement market during 2012.

Martin Bird, managing principal at Aon Hewitt and head of the Risk Settlement Group has given his outlook for the longevity risk market for the next year;

“The end of 2011 and now the start of 2012 have seen a flurry of activity on large-scale longevity swap transactions, with £6 billion of deals announced, including Rolls Royce/Deutsche Bank and Pilkington/Legal & General (L&G). In addition, we have also seen a pick-up in activity in the buy-in market, including a £1.1billion deal for Turner & Newall/L&G and one of £800m for Uniq/Rothesay Life.”

“This activity built up through 2011 and highlights the ongoing focus on managing pension risk, with both trustees and sponsors aiming to protect funding positions, manage cash contributions and reduce the volatility arising from significant legacy pension liabilities.”

“The longevity swap market in particular is really emerging as a major influence and we now have a critical mass of deals announced. With that we are starting to see some real standardisation in deal structure, which is helping to make these deals accessible across a much wider range of schemes.”

Aon Hewitt say they have invested heavily on this area of their business and aim to capitalise on that.

Martin Bird continued; “With the deals on which we have worked – both during 2011 and before – we can claim to be the leading advisor in the longevity swap market, and we look forward to helping more clients successfully execute risk settlement deals during the course of 2012. The overall risk settlement market, including longevity swaps, buy-ins and a number of other innovative means of transferring risk to the insurance and capital markets, is helping schemes and sponsors to take a much more pro-active approach to managing pension risk.”

The press release from Aon Hewitt contains a useful table showing the recent history of longevity deals. We’ve reproduced this below and included links to articles covering any deals which we have written about.

Date Fund Provider Approx size Solution
January 2012 Pilkington Legal & General £1 Bn Pensioner bespoke longevity swap
December 2011 British Airways Goldman Sachs / Rothesay Life £1.3Bn Pensioner bespoke longevity swap
November 2011 Rolls-Royce Deutsche Bank £3Bn Pensioner bespoke longevity swap
August 2011 ITV Credit Suisse £1.7Bn Pensioner bespoke longevity swap
February 2011 Pall J P Morgan £70M Non-pensioners index based longevity hedge
July 2010 British Airways Goldman Sachs / Rothesay Life £1.3Bn Synthetic buy-in (longevity swap plus asset swap)
February 2010 BMW Abbey Life / Deutsche Bank £3Bn Pensioner bespoke longevity swap
November 2009 Royal Berkshire Swiss Re £500M Pensioner bespoke longevity swap
July 2009 RSA Insurance group Goldman Sachs / Rothesay Life £1.9Bn Synthetic buy-in (longevity swap plus asset swap)
May 2009 Babcock Credit Suisse £1.5Bn Pensioner bespoke longevity swap (3 schemes)

Matt Wilmington, principal at Aon Hewitt and lead adviser on the Rolls-Royce and Pilkington transactions said; “Both the Rolls-Royce and Pilkington trustees entered into their longevity transactions as a way of improving the security of all the members’ benefits. In both cases, we worked closely with the trustees to identify an appropriate approach and deal structure.”

“Longevity swaps are attractive for many schemes as they specifically remove longevity risk, without disturbing schemes’ existing investment arrangements. This can be particularly helpful where schemes are relying on their asset portfolios to deliver returns to fund ongoing contributions and to help address existing funding deficits. However, continued improvements in life expectancy and the associated longevity risk are not something which many schemes and sponsors are prepared to chance, and so having the ability to remove that risk on cost effective terms has been a key driver in a number of deals.”

“But the market and the ways to approach these issues are evolving. The ability to add longevity swaps to an existing liability-driven investment portfolio in order to create a synthetic buy-in solution in-house, means that schemes have a real alternative to insurance buy-in solutions. That change should be helpful in creating a genuinely competitive market for risk settlement deals.”

Lynda Whitney from Aon Hewitt’s Risk Settlement Group and lead adviser to the Trustee of the Pilkington Superannuation Scheme said; “As lead advisers on the Pilkington transaction we worked with the Trustee of the Pilkington Superannuation Scheme to help them to understand and then reduce the longevity risk to their scheme. It is a key step in the trustee strategy to reduce risk and to help ensure the security of members’ benefits”

The longevity market has been promising a bumper year for a long time, however fears of a lack of liquidity or a mechanism to trade the risk seem to have held it back. Of course insurance-linked securities could provide the answer or longevity derivatives. Essentially it seems that some market participants are holding back due to concentration issues and that could continue until there is an efficient and cost-effective way to pass the longevity risk on to another party.

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