One-third of FTSE 100 has transferred pension longevity risk: Aon

An impressive one-third of the companies in the UK’s FTSE 100 index of leading shares have already transferred longevity risk associated with their pension schemes, according to Aon.

The insurance and reinsurance broker said that the 32 FTSE 100 companies that have entered into longevity risk transfer deals, either bulk annuities or longevity swaps, have between them resulted in over £70 billion of transaction volume.

That’s a lot of reinsurance capacity required to support these deals, so it’s no surprise that the longevity reinsurance market has grown significantly in recent years, although it remains dominated by a few, very large global players.

While it’s only one-third of the FTSE 100 index, these 32 firms entering into longevity related risk transfer deals represent easily more than one-third of those with defined benefit (DB) pension schemes, Aon explained.

In the majority of cases the risk transfer has been achieved through a pensioner buy-in or a pensioner longevity swap, Aon says.

However, a growing number of FTSE 100 companies, such as Rolls-Royce and Rentokil Initial, have opted for a full buyout instead, which enables the removal of all risk to secure pension benefits.

John Baines, partner in Aon’s Risk Settlement Group, commented, “The risk settlement markets have grown significantly in recent years, but an important fact that is often overshadowed is that the UK’s largest companies are at the forefront of this surge. Reaching £70 billion of risk transfer is a significant landmark and is indicative of the increasing attention that pensions risks are getting at the most high-profile UK businesses. Insurance solutions send a very clear message to analysts and shareholders that management are proactively addressing the issue of pension risk.

“Indeed, following some of the recent buy-out transactions, the participating companies have seen an increase in share price. The pension risk settlement market has generally seen gradual but significant growth, but with this backdrop we believe the number of pension risk settlement transactions will accelerate as they climb the agenda of FTSE100 companies and become seen as a reliable way to remove risk and secure pensioner benefits.”

Martin Bird, senior partner in Aon’s Risk Settlement Group, added, “This year Aon has advised on settlement transactions relating to the pension arrangements of several FTSE 100 schemes, including National Grid, Rolls-Royce and HSBC. These transactions span the spectrum of available insurance solutions across buy-in, buy-out and longevity swap, demonstrating the breadth of requirements of large schemes.

“While there are clear differences which reflect the differing natures of the companies, we have also observed commonalities between these projects. Not least among these is the appeal to insurers of partnering with high profile organisations. This means that while attractive terms can be available, capturing them requires stakeholder collaboration, robust governance and a flexible approach.”

Aon recently cited the availability of reinsurance capacity and its attractive pricing as a key driver for continued longevity risk transfer market activity.

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