Prudential Financial & Zurich help UK pension to £6bn longevity swap

Prudential Financial Inc. and insurer Zurich have worked together to provide an unknown UK pension scheme with a £6 billion longevity swap and reinsurance arrangement.

The International Reinsurance business of The Prudential Insurance Company of America (PICA), a subsidiary of Prudential Financial, Inc., provided the reinsurance capacity to support the transfer of longevity risks.

It’s the first longevity transaction Prudential Financial has entered into where another company has acted as an intermediary, with in this case UK regulated insurer, Zurich Assurance Ltd., acting as the intermediary, entering into the swap with the unnamed pension and passing through the longevity risk to Prudential Financial who reinsured it.

It’s Prudential Financial’s third largest UK longevity risk transfer or reinsurance arrangement so far, at UK £6 billion (US $8.4 billion).

The transaction uses a limited recourse, or pass-through structure, meaning the longevity and default risks are able to be passed through the insurer, onto the reinsurer.

“Last year, we expanded our offerings and launched funded reinsurance, where we reinsure both longevity and asset risk for our clients. This transaction further demonstrates our continued focus on innovating to meet the needs of our clients,” Rohit Mathur, head of transactions for PFI’s International Reinsurance business, explained. “At PFI, we see the use of a third-party onshore U.K.- regulated insurer as limited recourse intermediary as the logical next step in the de-risking solutions we can offer clients in our evolving business model.

“We continue to live in uncertain times, so it is more important than ever for us to unlock value for clients and provide them with as many options as we can.”

Willis Towers Watson (WTW) served as lead adviser to the trustee and pensions joint working group for the transaction.

Ian Aley, head of transactions WTW, said, “This transaction demonstrates the robustness of the longevity reinsurance market, with U.K. pension scheme trustees continuing their keen focus on removing risk. This is the third longevity reinsurance transaction we have partnered with PFI on in recent years, transferring in total more than £30 billion of longevity risk and enabling the trustees to progress their de-risking journeys. Each transaction used a different intermediary insurer – a Guernsey captive, a Bermudan captive and now Zurich as a U.K. insurer, demonstrating that structuring options exist for schemes with a wide range of governance, flexibility and cost requirements.”

Dave Lang, vice president, International Reinsurance Transactions and PFI’s transaction lead on this arrangement, also said, “Trustees are seeing the benefits in transferring longevity during the pandemic. We are so proud to be standing alongside all the people we worked with putting this structure together. We are all now experienced in providing trustees with pension de-risking options using an offshore captive or an onshore U.K.-regulated intermediary insurer to host the longevity reinsurance transaction, which creates the needed flexibility for clients looking to de-risk.”

Greg Wenzerul, head of longevity risk transfer, Zurich Assurance Ltd., commented, “There are many ongoing benefits for a U.K. Trustee in using a regulated U.K. insurance company for longevity risk insurance in this capacity, including cost certainty for the life of the transaction. For many sophisticated trustees of U.K. defined benefit pension schemes, the immediate removal of longevity risk, whilst using scheme assets in the most efficient and risk-aware manner, will continue to represent the optimal route to eventually secure all their liabilities. We expect our strong relationship and infrastructure with PFI to bring further opportunities for U.K. pension schemes.”

Lang further said, “Trustees who are looking to first hedge longevity risk have certainty that longevity transactions can be restructured within the agreed terms to meet their long-term de-risking goals, by accommodating future de-risking such as buy-ins, buy-outs, or transactions with consolidators in ways we have not seen before.”

“All indications are that the U.K. pension risk transfer buy-in and buy-out market activity will remain strong this year,” concluded Mathur. “The market for scheme-direct longevity transactions tends to be episodic but is predicted to be robust as well. We look forward to serving the needs of our clients in new ways in this vibrant market.”

James Parker, Pensions Partner at law firm CMS, who advised the pension, said, “Experience really matters in this market and it was crucial to the success of the transaction that both WTW and CMS have acted on a number of deals involving both Zurich and PFI. Delivering a transaction of this size and complexity in the midst of a pandemic is no mean feat and it would not have been possible without a high degree of collaboration between the trustees, sponsor, Zurich, PFI and their various advisers.

“This transaction underlines the remarkable resilience of the longevity risk transfer market. It also follows a number of other recent successes for the CMS Pensions team more widely in the de-risking space, including advising Pacific Life Re on the £10bn transaction with the Lloyds Banking Group pension scheme, acting on eight out of the 10 buy-in/out deals over £1bn in 2019, as well as six out of the eight longevity swap conversions that have taken place to date.”

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