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MNOPF in £1.5 billion direct longevity hedge to Pacific Life Re


The UK’s Merchant Navy Officers Pension Fund (MNOPF) has completed a direct longevity hedge or swap transaction with £1.5 billion of its members longevity risk ultimately being reinsured by life and longevity focused reinsurance firm Pacific Life Re.

The trustee of MNOPF has followed a recent trend of establishing its own special purpose insurance vehicle for the longevity swap transaction, using an incorporated cell established in Guernsey for this purpose. By entering into the insurance agreement with its own insurance vehicle, which then enters into a reinsurance agreement with the reinsurer, the pension fund can reduce its costs in effecting a longevity hedge or swap.

The MNOPF has used Towers Watsons recently launched Longevity Direct facility, which enables for quick and easy set up of an incorporated cell for use in longevity risk transfer transactions. By establishing a cell as a special purpose insurer pension funds can access longevity reinsurance or risk transfer capacity more easily and cheaply. This could help to stimulate increased transfer of longevity risks and also help to bring some of that risk to the capital markets in future.

The transaction covers the longevity risk of 16,000 members of the MNOPF pension fund. The agreement has been arranged as an insurance agreement between the MNOPF and the Guernsey incorporated cell MNOPF IC Limited, with a reinsurance agreement between MNOPF IC Ltd and Pacific Life Re enabling the longevity swap to be completed.

The use of incorporated cells are becoming increasingly widespread across insurance and reinsurance, taking lessons learned from the capital markets and collateralized reinsurance where they are widely used. Taking this one step further, should third-party capital want to access these risks it would be easy to imagine the incorporated cell being fully-collateralized, rather than it having to enter into a reinsurance agreement.

Could that be even more efficient for the pension fund? Perhaps. It will be interesting to see whether longevity hedging and risk transfer becomes attracted to lower-cost capital, although for the moment it seems traditional reinsurance capital rules this marketplace.

Rory Murphy, Chairman of the trustees of the MNOPF pension fund commented; “Today’s announcement is good news both for our members and employers. This innovative transaction significantly reduces the overall risk in the Fund and is a positive step on our journey to achieve full funding.”

Ensign Pensions & MNOPF Chief Executive, Andrew Waring, added; “The MNOPF has a reputation for using innovative insurance solutions to manage risk and improve security for members – as demonstrated by the successful buy-out of Old Section benefits last year. Longevity was a significant, concentrated risk for the Fund and, having considered the different options available, the Trustee Board decided that Towers Watson’s Longevity Direct structure was the most cost effective and efficient structure. This, combined with attractive reinsurer pricing, allowed us to hedge longevity risk without any material impact on our broader journey plan. Our actuarial, investment and settlement advisers, Towers Watson, and our legal advisers on this transaction, Norton Rose Fulbright, have been outstanding in helping the Trustee achieve its goals.”

Andy McAleese, Head of Annuity Transactions at reinsurance firm Pacific Life Re, saidd; “We are delighted to have been selected for the reinsurance of this transaction, which provides greater certainty for the MNOPF in relation to its longevity risk. This transaction further demonstrates Pacific Life Re’s experience and commitment to supporting solutions which help pension schemes and insurers manage longevity risk using structures tailored to their specific needs.”

Discussing Towers Watsons role in structuring and facilitating this longevity hedge through its Longevity Direct platform, Shelly Beard, Senior Consultant, explained; “This transaction is an important development for the MNOPF and for the longevity hedging market in general. Towers Watson, acting as Delegated Chief Investment Officer for MNOPF, identified that longevity was a major, growing risk for the Fund and we swiftly took action to analyse the risk and assist the scheme in brokering cost effective protection.”

“The option for schemes to access the longevity reinsurance market through a cell structure such as Longevity Direct will mean that hedging is more affordable for many schemes. It also reduces the complexity that is often associated with longevity hedging – the contractual negotiations on this transaction took less than two months. Longevity Direct offers schemes access to ‘ready-made’ incorporated cells, reducing the cost and governance requirements relative to a scheme setting up its own cell company.”

Legal advisor Maria Ross of Norton Rose Fulbright added; “We are delighted to have assisted the MNOPF in this transaction, which marks a significant development in the longevity market through the use of a Trustee-owned cell insurer.”

View our list of longevity swap, longevity reinsurance and risk transfer transactions.

Pacific Life Re clearly has quite an appetite for assuming risk at the moment. Recent articles below:

RGA in $200 billion mortality risk retrocession to Pacific Life.

Pacific Life Re reinsures £1 bilion of longevity risk for Rothesay Life.

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