The £7 billion longevity swap and reinsurance transaction that Prudential Financial, Inc. completed recently for the HSBC Bank UK pension scheme is the second largest such arrangement in longevity risk transfer market history.
This recently completed transaction marks a “pivotal moment” for the longevity risk transfer community, Prudential Insurance Company of America’s (PICA) Head of Longevity Risk Transfer Amy Kessler said.
It shows that the self-intermediated approach to longevity swaps and accessing reinsurance capacity has gained favour and Kessler said its now the strategy of choice for the very biggest pension schemes looking to offload longevity exposures to the reinsurance market.
Effectively, by putting a captive of special purpose insurance entity in the middle between a pension scheme and the reinsurance market, the pension can face off more directly with the reinsurers and gain efficiencies in the execution of the risk transfer deal.
So the pension scheme enters into the longevity swap or insurance contract with the captive or SPI, which in the case of the HSBC arrangement was its own Bermuda domiciled captive vehicle.
With the captive then entering into reinsurance agreements with the reinsurers, in this case Prudential Insurance Company of America (PICA).
The solution reduces costs and makes the whole process much more efficient for the pension scheme sponsoring the longevity risk transfer deal and Prudential sees the HSBC deal as part of a growing trend for intermediating the longevity reinsurance markets using a captive vehicle.
“While HSBC is the latest pension scheme to take advantage of the captive solution, developed in 2014 for our landmark transaction with British Telecom, we have reached a pivotal moment,” Kessler explained.
“The captive approach has become the strategy of choice for large pension schemes seeking to hedge longevity risk,” she continued.
Adding that, “The HSBC transaction demonstrates the level of credibility and success captive longevity risk transfer transactions enjoy in the current market.”
The £7 billion longevity swap and reinsurance transaction with HSBC is the second largest on record, after the 2014 transaction that saw British Telecom’s pension plan offloading around £16 billion of longevity risk also to Prudential through a captive intermediated swap and reinsurance arrangement.
This new HSBC deal is the first that sees a bank offloading the longevity risk associated with its pension plan members, which could suggest a broadening of appeal for these deals as well.
By putting a captive or owned insurance vehicle in the middle of the longevity risk transfer transaction, a pension can “efficiently access the deep and liquid longevity reinsurance market,” Prudential explained.
Further transaction flow is expected as well.
“Market demand for the certainty that comes with pension and longevity risk transfer has increased as Brexit nears,” commented David Lang, PICA’s transaction lead on the deal. “The UK is experiencing the greatest level of pension de-risking activity in history and we are proud to support this growing market with our capital, our capacity and our experience in helping pension schemes enhance retirement security for their members.”
Read about many historical longevity swap and reinsurance transactions in our Longevity Risk Transfer Deal Directory.