Q1 2014 saw highest level of longevity swaps & pension risk transfers


The first-quarter of 2014 saw the highest volume of longevity swaps and pension risk transfers, as pension plans took advantage of the strong appetite for longevity risk and ample availability of longevity reinsurance capacity.

Consultancy Hymans Robertson’s latest quarterly report on the pension buy-out, buy-in and longevity hedging market shows that Q1 2014 saw the highest level of activity on record for this growing sector. Just under £4.4 billion of pension buy-out and buy-in transactions were completed during the quarter, while a single £5 billion longevity swap transaction (the Aviva deal) helped to make this the busiest single quarter ever.

Pension risk transfers and longevity swaps by quarter

Pension risk transfers and longevity swaps by quarter - Source: Hymans Robertson

The longevity risk transfer market has been gaining attention in 2014, particularly from the large global reinsurance firms who tend to provide much of the capacity and bear much of the ultimate risk in these transactions. With reinsurance capacity abundant, the longevity reinsurance market is seen as a source of business which pays attractive premiums and where the capital markets are not having the impact that had perhaps been expected yet.

The pricing and availability of longevity risk transfer capacity is largely being driven by the willingness and appetite of reinsurers to take on more longevity risk. Available reinsurance capacity to support longevity risk is still on the rise and the expectation now, among the longevity risk transfer markets participants, is that the longevity market is ready to boom.

The strong deal flow seen in Q1 is perhaps testament to this appetite and the booming market. The graphic below shows pension risk transfer and longevity swaps by year since 2007 and last year, 2013, was the strongest single year in that comparison. At £9.395 billion in Q1 alone and two more longevity deals worth around £2.6 billion so far in Q2, 2014 is ready to slot in as the third strongest year already.

Pension risk transfers and longevity swaps by year

Pension risk transfers and longevity swaps by year - Source: Hymans Robertson

Since the 30th June 2009 there has been over £30 billion worth of longevity swap transactions alone, with more than a third of that (£10.6 billion) transacted in the year to 31st March 2014 alone.

The £5 billion Aviva longevity swap transacted in March was the largest single pension risk transfer on record as well as being the first to see the longevity risk transferred directly to the reinsurance market, rather than via an insurer.

Hymans Robertson said that current competition and attractive pricing in the longevity swap and reinsurance market means that it is seeing significant interest from other UK pensions to remove their longevity risk via a longevity swap.

Pricing is a key driver for the longevity market and current market conditions make it conducive for deals to come to market. Hymans Robertson said that the pace of this activity, driven largely by competition among reinsurers, is still accelerating and as a result it anticipates that a number of large transactions will be completed this year.

Also of note is the availability of longevity hedging solutions to much smaller pension schemes, with deals as small as £50m now a possibility, said Hymans Robertson.

The £5 billion Aviva longevity swap, which Hymans Robertson acted as lead advisor on, also bodes well for the market. With the risk transferred directly to insurers, rather than through an intermediary insurer, it could lead to a broader range of longevity swap deals transacted going forward.

“The deal marks a significant milestone in the approach to executing longevity swaps, opening the door for other pension schemes to pursue this path, with a view to optimising risk transfer and cost efficiencies from both the trustee and sponsoring company perspective by directly accessing the reinsurance market,” Hymans Robertson said in its report.

As a result of the competitive market pricing, availability of longevity reinsurance capacity, increasingly strong interest from pensions and the greater range of longevity hedging options available, Hymans Robertson expects the longevity risk transfer market to be particularly active over the next 6 months.

View our directory of longevity swap and risk transfer transactions.

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