Marsh & McLennan Companies, the broking and consultancy giant, has transferred a huge £3.4 billion chunk of longevity risks from its MMC UK Pension Fund to reinsurance capital through a deal transacted via a Guernsey based incorporated cell company.
MMC subsidiary Mercer led the transaction as advisor to the pension fund trustee and the deal is the first to be completed using the Mercer Marsh longevity captive solution, with no upfront premium.
The deal features £3.4 billion of liabilities covering around 7,500 pension fund members, offering a significant reduction in longevity risk.
It was structured as an insurance contract using the Mercer ICC Limited structure in Guernsey, which helped the pension fund access the reinsurance market more efficiently and directly.
Two incorporated cells were used, Fission Alpha IC Limited and Fission Beta IC Limited, to transfer the longevity risk to reinsurers Canada Life Reinsurance and The Prudential Insurance Company of America (PICA), with the reinsurance pricing said to be competitive.
The two reinsurers shared the risk equally and the use of the captive ICC vehicle meant that no insurer intermediary was required, making the deal more cost-effective for the sponsoring pension.
Suthan Rajagopalan, lead transaction adviser for the Trustee and Head of Longevity Reinsurance at Mercer, commented on the deal; “Mercer is delighted to have helped the Fund manage its longevity risk in this way. We worked closely with the Trustee to achieve a successful outcome for all parties and further help the Fund to continue its de-risking journey.
“Longevity risk is a key risk for defined benefit schemes and is more significant than ever in the historically low-yield environment. As part of this transaction, we have advised on and managed a broad and highly competitive process to remove this long-term risk and have been able to facilitate the transfer of risk to the reinsurance market cost-effectively through the ‘Mercer Marsh’ longevity captive solution.”
Pension fund Trustee Chairman, Bruce Rigby, added “Rising life expectancy has led to significant increases in UK pension scheme liabilities over the past couple of decades. The Trustee commissioned a full market review of all longevity risk transfer structuring approaches and corresponding providers. Based on a combination of factors such as cost, efficiency, future flexibility and security the Trustee selected the ‘Mercer Marsh’ longevity captive solution. By implementing this longevity hedge in partnership with MMC and its advisers, the Fund has taken a major step in removing this risk.”
Stephen Hawkes, Head of Office at Marsh Captive Solutions in Guernsey, also said; “Marsh was pleased to help establish an efficient mechanism to transfer longevity risks to the reinsurance market, working together with Mercer on this transaction to achieve a positive de-risking outcome for the Fund.”
Canada Life Re said it underwrote the transaction through its Barbados Branch, using a reinsurance agreement with Guernsey based captive insurer cells.
Tom O’Sullivan, General Manager of the Barbados Branch of Canada Life, commented; “I am pleased to announce this major reinsurance agreement, which reflects our ability to collaborate effectively with the MMC U.K. Pension Fund to create a solution to efficiently hedge their longevity risk.”
Jeff Poulin, Global Head of Canada Life Reinsurance, said; “This transaction highlights our expertise in underwriting large, complex and innovative risk transfer initiatives together with the value of our financial strength.”
Prudential said that this is the firms second reinsurance agreement using a captive structure, after the record £16 billion longevity risk transfer transaction with the British Telecom Pension Scheme in 2014.
“The MMC UK Pension Fund transaction reflects the fact that de-risking is the new normal,” commented Amy Kessler, head of longevity risk transfer at Prudential. “In every industry peer group, companies are choosing to reduce the longevity risk embedded in their pensions through buy-ins, buy-outs and longevity hedging. Today, a full range of solutions exist to help secure pension promises and reduce risk to funding levels.”
William McCloskey, head of international longevity transactions at Prudential, added; “We are proud the MMC UK Pension Fund and its captive insurer have entrusted their longevity risk transfer to us. This significant transaction highlights the importance of the captive solution in longevity risk transfer and proves the captive remains an important option for trustees to efficiently and cost effectively transfer longevity risk in the manner that works the best for them.”
“There remains a great deal of uncertainty with regard to future longevity improvements. Pension plans that decide to keep their longevity risk rather than hedge it are maintaining a risky strategy,” Kessler continued. “The timing may be particularly good for non-U.K. sponsors to accelerate their de-risking plans to take advantage of comparatively low sterling exchange rates.”
Read about many historical longevity swap and reinsurance transactions in our Longevity Risk Transfer Deal Directory.