Longevity swaps expected in 2022, but capacity may be more limited: Mercer

There have been £12 billion worth of longevity swaps in the UK pension risk transfer market in 2021, with total risk transfer including bulk annuity buy-in and out deals expected to reach £40 billion for the year.

Mercer expects that 2022 will eclipse this figure, forecasting some £60 billion of UK pension risk transfer for next year, with longevity swaps expected to make up a component of that market activity.

But the consultant warns that insurance and reinsurance capacity to support these large pension de-risking deals may not be as abundant, given the expected higher levels of market activity.

Which could push some pensions to look to alternative sources of capacity to underpin their pension risk transfer and longevity risk transfer arrangements, which might provide an opportunity for the life focused insurance-linked securities (ILS) funds to get more involved in this market segment.

The pension risk transfer and longevity swap market has become dominated by major global reinsurance players.

But the ILS market continues to have an appetite for longevity risk in some quarters, especially where arrangements are structured in swap form and index-based longevity risk transfer arrangements have always been particularly appealing for certain capital market investors.

Alternative risk transfer innovation continues to move the pension risk transfer space forwards, with segregated or protected cell intermediated longevity swaps one area where ILS market plumbing is being used to help bring the beneficiary of the protection closer to the sources of reinsurance capital they need to transact with.

Mercer expects alternative arrangements such as this to increasingly feature.

But with 2022 expected to be a significant year, capacity may become stretched which has ramifications for those seeking pension and longevity risk transfer and could drive some to look at alternative sources of reinsurance capacity.

Andrew Ward, UK Head of DB Risk, Mercer commented, “We predict 2022 to be the busiest year on record with more ‘jumbo’ buy-in and buy-out deals and longevity swaps expected. With demand likely to stretch providers’ capacity for providing proposals and implementing transactions, being well-prepared with a clear understanding of deal criteria is vital.”

Reflecting on 2021’s pension risk transfer activity, Ward said, “The big winners have been those well-prepared schemes that came to market early with clear pricing targets and condensed broking processes. Despite the continued challenges for many from the evolving COVID-19 pandemic, the primary driver remains to obtain protection against uncontrolled risk.”

Concluding, “Given the improvements in funding levels this year and increased regulatory focus on long-term funding objectives, more schemes will be weighing up a diverse and growing range of risk transfer and alternative options for shoring up member security and moving towards their end goals. The starting point must be a clear understanding of objectives and the range of solutions so that trustees and sponsors can determine the right path and then follow it with confidence.”

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