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Deutsche Bank in £1 billion longevity swap for Carillion pension schemes


A £1 billion longevity swap transaction has been completed by Deutsche Bank AG for five of the Carillion plc support services groups defined benefit pension funds, with the risk ultimately being passed onto reinsurers.

The longevity swap will hedge the risks of current pensioners within five pension schemes run by Carillion living longer than expected. The swap transaction covers 9,000 pensioners with a liability of around £1 billion and Carillion said it has no immediate cash impact on the company.

Commenting on the longevity swap, Richard Adam, Carillion Group Finance Director, stated; “We are delighted the Trustee has secured this deal to remove a significant amount of risk at an attractive price. The longevity swap reflects Carillion’s commitment to ensuring the security of the benefits of all our pension scheme members and reducing pensions risk.”

Robin Ellison, Chairman of Carillion (DB) Pension Trustees Ltd, added; “Pension scheme liabilities have risen significantly in recent years due to increasing life expectancy. The Trustee is pleased to announce that by completing this transaction with Deutsche Bank AG, it has hedged this risk for the members covered by the swap thereby helping to improve the security of benefits for all members.”

The longevity swap transaction was advised by PwC and Mercer, with PwC’s team advising Carillion plc and Mercer advising the pension fund trustees. The advice ranged from transaction support on the feasibility of the deal, provider selection assistance, advice on how to access the necessary reinsurance capacity, structuring assistance, contractual terms and implementation advice.

PwC and Mercer worked alongside each other to devise and implement a strategy which ensured that the five separate pension schemes, which range in size from approximately £50m to £400m, were all priced for the swaps purposes as a single scheme but the deal was actually executed as five separate swap contracts. This helped to keep the costs down on the transaction but also benefitted the trustees by keeping the flexibility and characteristics of individual longevity swap contracts.

Andrew Ward, lead advisor to the Trustee and Suthan Rajagopalan, who also advised the Trustee, both from Mercer, said they are seeing increased demand for these deals; “This is another example of a trustee and sponsor looking to capitalise on the opportunity to manage the risk associated with longevity. We are seeing increasing interest in this area as trustees and sponsors develop their plans to reach a sustainable position in the longer term.”

The risk has ultimately been transferred via the swap to international reinsurers, we’re not sure at this stage whether any capital markets money has backed any of this transaction.

Ward and Rajagopalan from Mercer added; “International reinsurers are the ultimate destination of the risk for longevity swaps. Working closely with Deutsche Bank, Mercer and PwC used our collective deep knowledge of established and new reinsurers to ‘lift the bonnet’ on pricing and terms which was key to securing the best package. Kicking the tyres on the Schemes’ information, including asking the pensioners for up to date information on marital status, allowed the reinsurers to sharpen their prices.”

Paul Kitson, a partner in PwC’s pensions team and the lead advisor to Carillion plc on the transaction said; “This was a complex transaction which required new thinking in tackling increasing life expectancy across a number of schemes. Focussed execution management was vital to get the best outcome for the Company and Trustee. This deal enables companies who sponsor a number of schemes and had previously thought that a grouped longevity swap was not achievable to reconsider their risk management options.”

This is an important point. It has often been thought that small pension schemes, or those organisation with multiple schemes, could not access the longevity swap market. This transaction shows that it is possible to bring multiple schemes to market at once.

The 5 schemes covered by this longevity swap for Carillion are the Alfred McAlpine Pension Plan, the Carillion B Pension Scheme, the Carillion Staff Pension Scheme, the Mowlem Staff Pension and Life Assurance Scheme and the Planned Maintenance Engineering Ltd Staff Pension and Assurance Scheme.

Kitson continued; “We expect companies’ appetite to protect themselves against unplanned pension payments from people living longer will continue. Demand for such transactions could raise the risk that over time pricing will increase as reinsurance capacity is used up. Schemes and sponsors who are holding back on deals to see how the market and pricing develops could be playing a risky strategy as the market for longevity hedging deals could ultimately lead to a capacity crunch, which could lead to higher prices.”

Once again more longevity risk is passed on to large reinsurers in swap form showing that the market for these deals is alive and kicking. Each time a new longevity swap comes to market it tends to feature something new or innovative, in this case the bundling of mutliple schemes, showing that the longevity risk transfer market is still developing apace.

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