Longevity swaps totalling £250bn forecast for next decade: Hymans

Hymans Robertson LLP, the pensions and financial services consultants, expects that longevity risk transfer activity will remain high in the United Kingdom across the coming decade, with as much as UK £250 billion of longevity swaps likely to be transacted by 2031.

That’s on top of a forecast £450 billion of pension buy-in and buy-out deals, taking the expected total UK pension risk transfer activity for the next ten years to £750 billion.

This suggests the need for significant longevity reinsurance capacity to support the needs of pension funds looking to offload their longevity risk and provide greater funding certainty to their beneficiaries.

Since the pension risk transfer and longevity risk transfer market came into being in around 2007, some UK £300 billion of risk has been transferred.

By the end of 2031, Hymans Robertson expects the total will reach £1 trillion, of defined benefit pension scheme risk insured.

2020 saw roughly £55 billion of pension risk transferred to insurance and reinsurance companies, roughly £24 billion of which was in longevity swap arrangements.

We’ve detailed all of those in our longevity risk transfer and reinsurance transaction directory here.

James Mullins, head of risk transfer at Hymans Robertson, commented on the forecasts, “£1 trillion of insurance would be equivalent to around half of the value of all gilts currently issued by the UK Government or around half the value of all of the companies in the FTSE 100. Indeed, with the level of growth in pension scheme buy-ins and buy-outs that we are projecting, we can expect to see several insurance companies become some of the largest companies in the FTSE 100 over the next 10 years.

“Our analysis projects when each individual defined benefit pension scheme in the UK is expected to be able to afford to insure its pension promises. These projections show that we expect demand from pension schemes for buy-ins and buy-outs to average at over £40 billion a year during the next decade. This is due to a combination of factors such as funding requirements meaning that sponsoring employers will need to fund pension schemes to a higher level and the cost of insuring deferred member liabilities having reduced materially in recent years. These points mean that the additional money a pension scheme needs to get to buy-out is less than it has been in the past. This gap will reduce further as pension schemes mature, as more contributions are paid in and as investment risk is reduced further.

“The UK pension scheme risk transfer market is leading the world in terms of volume, maturity and innovation, with around £0.3 trillion of pension scheme risk now having been insured via buy-ins, buy-outs and longevity swaps. To put that into context, that means that the longevity risk associated with around 17% of all defined benefit pension scheme liabilities in the UK has now been insured, up from just 1% ten years ago. Pension scheme risk transfer is developing rapidly in other countries too, such as the USA, Netherlands and Canada and those countries are watching with interest how the market develops in the UK.”

Given the run-rate of longevity swaps isn’t forecast to increase too much, as by year the volumes look set to be the same, it suggests traditional reinsurance capital will still be able to soak up most of this deal flow.

For capital markets capacity to be given an entry point into this longevity swap activity, it seems efforts to reduce the basis risk in index based longevity swap arrangements may be necessary, so pensions can gain greater confidence in the coverage they provide.

Still, in time, we could see new attempts to securitise longevity risk as well, as the insurance-linked securities (ILS) market can be an efficient provider of the reinsurance capacity needed to support pension risk transfer.

It’s always worth noting that this is just in the United Kingdom, when there are longevity related pressures on pension funds in far more financial regimes around the world.

As longevity risk catches up with pensions ability to maintain funding levels, there is an inevitability that some levels of risk transfer will be required by pensions in many more regions of the world, accentuating the need for reinsurance and risk capital to support this exposure.

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