Rolls-Royce in £3 billion longevity swap with Deutsche Bank

Aerospace and engineering firm Rolls-Royce has announced the completion of a longevity swap transaction completed to give additional security to the members of its final salary pension scheme. In a longevity swap contract with Deutsche Bank, Rolls-Royce have offloaded some £3 billion worth of pension liabilities, covering some 37,000 pensioners.

Rolls-Royce said the costs of the transaction would be borne by the pension fund and that it would have no material cost on funding.

Under the longevity swap transaction, Rolls-Royce pension fund trustees and Deutsche Bank have agreed on an average life expectancy. If pensioners live longer than this then Deutsche Bank make payments to the pension fund to help them meet their liabilities. If the reverse happens, the cost of making pension payments drops and the fund will have to make payments to Deutsche Bank.

Andrew Shilston, Rolls-Royce Finance Director, said: “We have made sure that as our pensioners live longer in retirement we have made proper provision for them. This is the latest in a series of measures we have taken to achieve greater certainty for our future funding requirements”.

Andrew Reid, Managing Director and European Head of Pensions Origination, Deutsche Bank, said; “Deutsche Bank has shown clear leadership in this growing market. Our team from across the Corporate & Investment Bank combined structuring expertise with Deutsche Bank’s balance sheet strength to deliver a cost effective solution for the Rolls-Royce Pension Fund.”

Deutsche Bank have apparently offloaded much of the longevity risk to reinsurers as part of this transaction. French reinsurer SCOR participated in this part of the transaction with SCOR Global Life SE entering into their first longevity reinsurance transaction in the UK. They say that they have reinsured a “significant share of the longevity risk assumed by Deutsche Bank, following the completion of a GBP 3 billion longevity swap transaction between Deutsche Bank and the Rolls-Royce Pension Fund in the UK.”

Gilles Meyer, CEO of SCOR Global Life, commented; “This deal confirms the transaction execution capability of the Longevity team in London. We have successfully and effectively been able to transpose the market-leading brand characteristics for which the wider SCOR team is known onto a new and innovative market. We are delighted to have been able to partner up with Deutsche Bank on this transaction.”

Denis Kessler, Chairman and CEO of SCOR, said; “The completion of this transaction is a key milestone in terms of demonstrating the Group’s ability to deliver on the initiatives set out in the “Strong Momentum” plan.We look forward to being a leading part of the Longevity market over the years to come.”

Aon Hewitt acted as lead advisor to the Trustees for this longevity swap transaction. Martin Bird, Managing Principal at Aon Hewitt, said; “The Rolls-Royce Trustees entered into the swap to further enhance the security of all the members’ benefits. We worked closely with the Trustees to decide that this was the right approach for them to take and also that the swap was structured in a way that offered the best possible terms on price, security and other key longevity hedge features.”

Again, we can see significant longevity risk being handed off from pension fund to an arranging bank and ultimately to reinsurers. The way this transaction is structured almost begs for it to be transferred to the capital markets in insurance-linked security form, particularly as the payments between the bank and the fund are based on longevity divergence from an agreed average.