Swiss Re Insurance-Linked Fund Management

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Longevity swap market back in business: Aon


Broker Aon said this morning that the “longevity swap market is back in business” after a hiatus in activity over recent months, with a record year expected as evidenced by the recent completion of a £2 billion longevity swap and reinsurance deal involving insurer Zurich and the UK’s National Grid pension fund.

As we wrote yesterday, Zurich has completed its largest ever longevity swap arrangement, an intermediated deal covering £2 billion of pensioner liabilities for the UK’s National Grid Electricity Group of the Electricity Supply Pension Scheme (ESPS).

Aon was the intermediary as lead advisor for this transaction.

The broker said that this transaction is, “A clear signal that the longevity swap market is back in business, with improved reinsurance pricing and a range of options for accessing this.”

Aon and other firms are all expecting the longevity swap and reinsurance market to bounce back in 2018, as pricing for coverage has become better understood now that the latest mortality data has been taken into account in reinsurance markets.

Tom Scott, principal consultant within Aon’s Risk Settlement Group, commented on the deal, “This latest transaction illustrates that a range of longevity swap structures is available, giving scheme trustees and sponsors the opportunity to select an approach which meets their specific needs.

“Longevity swaps play an important role in a scheme’s long-term de-risking journey. Accordingly, thinking about this longer term perspective is a critical element of the commercial discussion which scheme trustees and sponsors should ensure is addressed at the outset. A key feature of National Grid’s transaction was the constructive dialogue with both Zurich and Canada Life Reinsurance which enabled agreement of various contractual provisions to future-proof the contract. For example, it enabled us to set out a framework under which future annuitisation can take place, should this become an objective for the scheme.”

Martin Bird, senior partner and head of the Risk Settlement Group at Aon, added, “Now that we have seen pricing settle back after it became dislocated 18 months ago, we are seeing a revived focus on the use of longevity swaps. In particular, for schemes with investment strategies which do not permit the use of bulk annuities, the swap structure is an effective way to control longevity risk.

“For those schemes with relatively well de-risked investment portfolios, bulk annuity pricing also remains very favorable, reflecting both attractive longevity reinsurance capacity and insurers continuing to source attractively priced long-dated assets that are capital friendly in the Solvency II regulatory environment.

“Overall, the risk settlement market remains buoyant and, as we approach the mid-way point in 2018, we remain confident that we will see over £30 billion of deals executed over the year.”

Andrew Ward, Partner and Head of Risk Transfer at Mercer, which advised the pension, agreed with this forecast saying, “We are delighted to have advised National Grid on this project. The longevity swap will substantially reduce longevity risk and give the Company greater certainty on pension costs.

“Longevity risk remains a major concern for many pension schemes, as funding levels have improved for many schemes, we are noticing a significant trend from focusing on achieving full funding on a technical provisions basis to trying to lock down the risk for good. We expect further activity in both the longevity swap and bulk annuity markets over the remainder of year and beyond. 2018 looks set to be a record year with up to £30bn or more of deals likely to be transacted.”

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

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