HSBC UK pension gets £7bn longevity swap from Prudential

The UK pension scheme of HSBC Bank has entered into a longevity swap transaction covering £7 billion of its liabilities with The Prudential Insurance Company of America (PICA), part of Prudential Financial, Inc.

The longevity swap will help HSBC to manage the longevity risk of roughly £7 billion of pensioner liabilities, making this the second largest longevity hedging transaction ever seen for a UK pension scheme.

HSBC said the longevity swap will provide its pension scheme with long term protection against costs resulting from pensioners or their dependants living longer than initially expected.

This enhances the overall security of the pension for its members and covers roughly half the pensioner liabilities.

The longevity insurance policy will become part of the pensions investment portfolio, HSBC said.

The longevity swap and risk transfer transaction has been structured as an insurance contract, utilising an HSBC-owned captive insurance vehicle domiciled in Bermuda and onwards reinsurance to PICA.

By putting the captive in the middle, HSBC can more directly access the longevity reinsurance capacity provided by Prudential, which makes this longevity swap and reinsurance deal more efficient and cost-effective for the bank.

Russell Picot, Chair of the HSBC Bank (UK) Pension Scheme, commented on the news, “I am delighted that the Trustee has taken an important step to ensure that our members’ benefits are strongly secured against improvements in life expectancy. This is a continuation of our de-risking journey and we are pleased to have completed the deal at attractive pricing and working in partnership with our sponsor. This is a positive step in providing additional security of members’ pensions.”

Amy Kessler, Head of Longevity Risk Transfer at PFI, added, “PICA is delighted to support the Trustee in transferring longevity risk through this transaction, covering c£7 billion of HSBC pensioner liabilities. As the global growth accelerates in pension de-risking, our team remains fully committed to providing solutions which help pension schemes and insurers manage longevity risk using innovative structures tailored to meet their specific needs.”

James Calladine, Chief Risk Officer, HSBC UK Bank plc, also said, “This transaction marks another sensible and positive step on the Scheme’s de-risking journey, with terms that make financial sense for both the Trustee and for the Scheme’s sponsor, HSBC UK Bank plc.”

Nick Robinson, Director of Client Solutions, HSBC Bank plc, commented, “HSBC has long supported the Trustee’s actions to manage risk. In this case we are especially pleased that we could offer HSBC’s own people and existing infrastructure, then work collaboratively with the Trustee and its strong Executive team to help develop and implement the chosen solution.”

Ian Aley, Willis Towers Watson, lead adviser to the Trustee, stated, “This transaction was the result of a thorough review of the Scheme’s risk exposures and the options for reducing these, complementing the Trustee’s ongoing de-risking programme. We worked with the Trustee to achieve a highly competitive reinsurer selection process, following which we guided the Trustee through the analysis to select a Bermudan captive as the most efficient structure for the deal, a market first.”

Paul Philips, Sackers, legal adviser to the Trustee, added, “We are delighted to have assisted the Trustee in this transaction, which marks a significant development in the longevity market through both its size and the use of a Bermudan captive insurer.”

The pension scheme Trustee was advised by Kramer Levin Naftalis & Frankel LLP in New York and Appleby (Bermuda) Limited in Bermuda.

HSBC in Bermuda was advised by Allen & Overy LLP, Aon and Appleby (Bermuda) Limited. PICA took advice from Willkie Farr & Gallagher LLP and ASW Law Limited.

Read about many historical longevity swap and reinsurance transactions in our Longevity Risk Transfer Deal Directory.