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Legal & General and BAE in longevity swap covering £1.7 billion of liabilities


Another large UK longevity swap transaction has completed, the third such deal in just two weeks, this time involving Legal & General entering into agreements with two of BAE Systems pension funds and passing much of the ultimate longevity risk to global reinsurance firms.

BAE Systems said that it along with the Trustees of two of its pension funds, the Royal Ordnance Pension Scheme and the Shipbuilding Industries Pension Scheme, have entered into longevity swap agreements with Legal & General. The arrangement sees L&G insure the risk of increases in pension liabilities resulting from increases in life expectancy for the two schemes.

Around 17,000 pensioners are covered by the longevity swap arrangements and the swap covers approximately £1.7 billion of liabilities, according to BAE Systems.

The longevity swap sees much of the liabilities covered passed on to global reinsurers, L&G said that 85% of the risk from the Royal Ordnance Pension Scheme would be ceded to German reinsurance firm Hannover Re, while 70% of the risk from the Shipbuilding Industries Pension Scheme is being passed on to Reinsurance Group of America. L&G retains the rest of the risk.

To effect the deal, L&G simultaneously put in place separate longevity insurance arrangements for each of the two schemes, covering a total of £1.7 billion of liabilities as measured using the schemes’ funding assumptions, or £1.8 billion discounted at Libor.

Under the terms of the transaction, the pension schemes will make pension payments to Legal & General for an agreed term, in exchange for which Legal & General will make pension payments into the schemes for the remaining lifetime of the pensioners.

Peter Lynas, Group Finance Director BAE Systems, commented; “We seek to mitigate pension liability volatility where we can.  This arrangement provides us with a greater degree of certainty as to future pension scheme cash-flows as we continue to make provisions for our pensioners.  This is another proactive measure we have taken as part of our strategy to manage risk associated with our pension schemes.”

L&G said that this transaction; “Demonstrates the increasing appetite of pension schemes and their sponsors, for insuring pension scheme risk, as well as Legal & General’s position as a leading provider in the de-risking and longevity insurance market.”

Tom Ground, Head of Legal & General’s Bulk Annuity and Longevity Insurance business, commented; “Legal & General is delighted to have worked with the Trustees of The Royal Ordnance Pension Scheme and The Shipbuilding Industries Pension Scheme, to put in place these arrangements and to assist BAE Systems in further de-risking its pension obligations. Legal & General has now insured over £7.5bn of pension scheme risk in 2013, including the acquisition of Lucida, and secured over 40% of the insurance de-risking business written across the market this year.

We remain committed to providing bespoke solutions to help both scheme trustees and sponsors achieve their de-risking objectives. Our ability to complete two longevity insurance transactions simultaneously is a reflection of our expertise and experience in this area and our track record of seeing processes through to completion quickly and efficiently ensures trustees get best value through the engagement we are able to obtain from reinsurers.”

Aon Hewitt acted as lead adviser to BAE Systems and the Trustees of the Royal Ordnance Pension Scheme and the Shipbuilding Industries Pension Scheme.

Martin Bird, Senior Partner and Head of Risk Settlement at Aon Hewitt, stated; “We worked closely with both sets of Trustees and with BAE Systems, to structure and execute the collateralised insurance arrangements. Notable features of these deals included structuring CPI linked longevity protection and developing an effective structure appropriate for the sectionalised nature of the Shipbuilding Industries Pension Scheme.”

Nigel Tinsley, Group Pensions Director at BAE Systems, added; “Following the success of the transaction we completed early in 2013, we are again pleased to have reduced the longevity risk exposure within another two of our pension scheme arrangements. We conducted a competitive selection process to appoint Legal & General in June and worked closely with Aon Hewitt to conclude the projects, quickly and efficiently.”

Legal & General and Hannover Re were involved in a previous longevity swap for BAE, which was at the time the largest such transaction at £2.7 billion of liabilities covered.

Other recent longevity risk transfer transactions:

Deutsche Bank helps AstraZeneca secure £2.5 billion longevity swap

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

Aegon in €1.4Bn longevity risk transfer to capital markets and reinsurers

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