Reinsurer Hannover Re have announced the completion of a longevity swap transaction which see’s them assume around £1 billion of longevity risks associated with a portfolio of pension obligations held by UK insurer Legal & General. The portfolio involves the pension obligations of around 11,500 employees of UK industrial firm Pilkington who are all actively drawing a pension. This defined block of longevity transaction is the first major longevity risk transfer to be announced in 2012.
Legal & General have insured the active members of the Pilkington Superannuation Scheme, to offset the risks of its pensioners living longer than expected. This covers approximately 80% of the pension schemes assets. L&G then entered into this longevity swap reinsurance transaction with Hannover Re to hedge those risks off their own balance sheet.
Tom Ground, Head of Business Development for Legal & General Pension insurance solutions, said; “Legal & General is delighted to have been chosen by the Trustee of the Pilkington Scheme for this important deal as it demonstrates our capability to provide a full range of de-risking solutions that delivers significantly enhanced security to members. The arrangement also reflects the Trustee and its advisers’ commitment to work with a longevity insurance provider they believe has the expertise and financial security to deliver.
This transaction leverages Legal & General’s expertise and buying power in the reinsurance market as one of the largest purchasers of life reinsurance.
This arrangement, which follows the recent £1.1bn buy-out deal with the T&N Scheme, further demonstrates Legal & General’s ability to provide large-scale insurance solutions in the pension de-risking market. Legal & General continues to offer comprehensive de-risking solutions to pension schemes of all sizes.”
Tim Breedon, Group Chief Executive at L&G, said, “In the UK and globally, the pension fund de-risking market will continue to grow as pension funds look to further de-risk. In 2011 we completed our first £1 billion pension buy-out, and today we have announced our first ever longevity insurance swap. These transactions leverage our expertise in investment management and longevity risk pricing, and I see us remaining at the forefront of this rapidly developing pensions market. Legal & General can provide comprehensive de-risking solutions, including buy-out, buy-in, longevity insurance and liability driven solutions to pension schemes of all sizes.”
Hannover Re said in their announcement that the remainder of the scheme’s risk will remain with L&G. Hannover Re are only assuming the biometric risk, not the investment and inflation risks associated with the pensioners and the scheme’s assets.
“With this transaction we are cementing our leading position in the attractive longevity risks market”, Hannover Re’s Chief Executive Officer Ulrich Wallin explained. “Going forward, too, we anticipate good business opportunities since it is likely that companies will increasingly seek to limit their direct pension obligations.”
Hannover Re anticipates to receive premium income of roughly GBP 800 million over the entire term of this transaction, with some GBP 60 million attributable to the 2012 financial year.
Since concluding its first longevity block reinsurance transaction back in 1998 Hannover Re has assumed pension obligations totalling altogether around EUR 5 billion. How these longevity risks in turn get hedged by reinsurers is a particularly interesting part of the longevity risk transfer market, as it is clear that the capital markets will have a role to play in achieving risk transfer for the assuming reinsurers.