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Longevity swap pricing to remain attractive in 2021: WTW


Longevity swap pricing is expected to remain attractive through the coming year, as reinsurance capital to support large pension risk transfer deals remains abundant and slower mortality improvements feed into reinsurance pricing, according to Willis Towers Watson (WTW).

Willis Towers WatsonAfter a busy year in 2020, when the market for longevity swaps and longevity risk transfer hit forecasted levels of activity and we listed just over £24 billion of longevity swap deals in our Directory, WTW is forecasting market conditions to remain conducive for the year ahead.

One of the drivers for this has been a general slowing in mortality improvements, the company explained, something that now could be exacerbated further by the COVID-19 pandemic and how that effects mortality rates.

Even before the pandemic hit, the slowdown in mortality improvements seen in recent years has been factored into the reinsurance pricing offered to support longevity swaps, WTW explained.

The result, is “the lowest pricing relative to pension scheme reserves on record,” the company noted.

On top of this, increasing competition in the market for longevity reinsurance deals is also helping to pressure pricing and keep reinsurers keen.

With the end result being the driving down of longevity swap and bulk annuity pricing, as well as pricing of capacity for pure longevity reinsurance deals, something WTW believes is set to persist.

As a result, the broker expects 2021 could see £25 billion of UK longevity swaps.

Ian Aley, Managing Director in Willis Towers Watson’s Transactions team, explained, “The pensions de-risking market has proved itself to be incredibly resilient and, while uncertainty will remain in 2021, we don’t see this denting the desire and ability for pensions schemes to complete risk management transactions.

“It remains to be seen what impact COVID-19 will have on longer term expectations for mortality rates. For many schemes, the market pricing of longevity will currently look very attractive relative to their funding reserves. We therefore expect schemes will continue to look to lock into assumptions which are affordable against their current funding target to reduce future uncertainty as part of their wider hedging programmes.”

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