Global reinsurance firm Munich Re has entered into a longevity swap with the Lafarge UK Pension Plan, the pension scheme of the global building materials company, protecting it against the risks of its pensioners living longer than forecast.
For defined benefit pension schemes, which is the majority of the Lafarge plan, there is a risk that pensioners live longer than anticipated, meaning regular pension payments have to be made for longer than forecast and putting the plans under financial stress.
As a result, many UK pension schemes choose to offload the longevity risk associated with specific cohorts of their pension plans, in many cases passing that risk onto a major reinsurance provider, or in some cases capital markets backed sources of reinsurance capacity.
The longevity swap, which was actually completed last August, allows the pension to hedge the risk of pensioners living longer lives, while Munich Re will have received a premium for taking on the exposure.
Roger Mountford, Chairman of the Lafarge UK pension, explained in a recent report that the plan, “took an important step by entering into a longevity swap with Munich Re in August.”
The trustee for the pension conducted a review of the market to consider its options for hedging the longevity risk associated with plan members, concluding that a longevity swap with Munich Re was the best route to follow.
Longevity risk had been identified as the largest single exposure the pension faced, with respect to its funding levels and ability to make ongoing payments to pensioners.
The pension said that while “gains in life expectancy are good news” they impact its ability to remain funded and raise the costs of providing pensions, making it attractive to pass on the longevity risk to an insurance or reinsurance counterparty.
Lafarge explained that under the longevity swap it will receive payments from Munich Re to help offset any increase in its liabilities should the longevity of its covered pensioners be higher than expected.
Details on the transaction are scarce, but we’ve aded it to our Longevity Risk Transfer Deal Directory, where you can read about numerous historical longevity swap and longevity reinsurance transactions.