Consultancy Mercer, insurance firm Zurich and reinsurance firm Pacific Life Re have assisted an unnamed UK pension plan to offload the longevity exposure associated with a “named life” group of pensioners in a streamlined longevity hedge.
Mercer acted as lead advisor to the trustees for the transaction which involved £90 million of pensioner liabilities for whole-of-life. Zurich Assurance contracted with the trustees to arrange a streamlined hedging arrangement, while Pacific Life Re immediately provided the reinsurance capacity to complete this longevity swap.
The transaction is hailed as the first longevity hedge for “named life” risks for a small pension fund, which cold open the doors to longevity swaps and reinsurance capacity for smaller pension plans in the future and expand the longevity risk transfer market as a result.
The hedge was structured as a whole of life insurance policy, transferring the risk of rising costs associated with pensioners living longer than expected. It covers 200 named pensioners and their contingent dependents, hence “named life”, with total liabilities of around £90 million.
The three parties involved in the deal, Mercer, Zurich and Pacific Life Re, worked together to establish the flows required to first hedge the risk between the pension plan and Zurich and then to reinsure it immediately to Pacific Life Re efficiently.
The processes were streamlined to make the deal cost-effective even at the smaller size. Longevity swaps and risk transfer deals are often well into the billions in size.
Previously, this type of “named life” longevity swap or hedge was solely the domain of larger pension plans with liabilities well into the hundreds of millions, or billions. The hope is that this type of streamlined swap or hedge can make accessing risk transfer capacity more efficient for smaller pensions, and accessing the reinsurance capacity more efficient for the intermediary insurer.
Suthan Rajagopalan, lead transaction adviser and Head of Longevity Reinsurance at Mercer, explained; “Before this transaction, ‘named life’ longevity hedges were exclusive to the largest schemes with over £400m of pensioner liabilities. This deal unlocks the door to competitive longevity reinsurance pricing for small and medium sized schemes which are more exposed to so called concentration risk where there is greater variability in members’ life expectancy due to diverse pension amounts in smaller populations. Mercer’s co-ordination of the whole value chain culminated in immediate reinsurance by Zurich with Pacific Life Re to minimise the longevity risk transfer cost for the Trustees. This has never been achieved before for a deal of this smaller size.”
Rajagopalan continued; “Mercer is delighted to have helped the Pension Plan Trustees to be the first to transact a streamlined named life longevity hedge. Mercer worked closely with the Trustees over a number of months to test feasibility, broker competitive longevity reinsurance pricing, train the Trustees on Zurich’s streamlined longevity hedge, prepare for and execute implementation.”
The Chairman of the Trustees added; “The Pension Plan was an early adopter of interest rate and inflation hedging and the Trustees are pleased to seize this early opportunity to hedge longevity risk for its pensioners and their dependants. This transaction helps to improve the security of benefits for all members by removing the uncertainty of future costs to the Plan arising from existing pensioners living longer than forecast. We retain our ability to manage our investments to meet the Pension Plan’s future liabilities and flexibility for further de-risking. Mercer has done an excellent job in advising the Trustees and sourcing this de-risking opportunity and delivered an attractive outcome for the Pension Plan.”
Simon Foster, Managing Director of Corporate Life and Pensions at Zurich UK, said; “We are excited to play our part in this innovation in the longevity market. Working with the Trustees, Mercer and our reinsurers, we have been able to demonstrate that exposure to these risks can be managed at much lower liability levels than previously assumed.”
Alastair Walker, Principal at Mercer and Scheme Actuary for the Pension Plan, commented; “The Trustees expressed interest in longevity hedging some time before streamlined solutions became available and had ruled out bulk annuities due to the costs and upfront premiums required. Being a named life hedge, the longevity risk transferred includes both uncertain longevity improvement trend rates and concentration risks. This transaction has reduced risk, enhanced the security of members’ benefits and increased certainty over future funding costs. The hedge is unfunded so no premium has been paid upfront retaining investment flexibility for the Trustees.”
Rajagopalan concluded; “This is an exciting development and there are other streamlined longevity hedges in the implementation phase. Smaller pension schemes like this one can now benefit from a strong pre-negotiated standard longevity insurance contract developed between Mercer and Zurich with competitive pricing tension provided by Mercer’s panel of longevity reinsurers who ultimately share the longevity risk.”