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Original Risk: A Society for Change Agents

Size barriers fading in longevity risk transfer: Aon Hewitt


Recent developments in the longevity risk transfer market have ‘shattered preconceptions’ that longevity swaps are only for big pension schemes, according to Aon Hewitt, the retirement product unit of insurance and reinsurance broker Aon.

The perception was that longevity swaps were only for pension schemes of £1 billion and larger, while bulk annuity solutions were more appropriate for sub £1 billion pension schemes, or schemes with no remaining sponsorship.

Recent developments and transactions seen in the market for longevity risk have shattered both of these preconceptions, according to Aon Hewitt and there is now no reason to feel that size matters if a pension scheme wants to offload its longevity risk using a swap.

Aon Hewitt cites recent multi-billion pound longevity risk transfer deals for ongoing pension schemes which have involved bulk annuity purchases, such as the recent £1.6 billin Total UK Pension Plan deal and the £3.6 billion AkzoNobel ICI Pension Fund transaction.

At £3.6 billion in size, the ICI transaction demonstrated that there is appetite and capacity in the insurance market for ‘jumbo’ bulk annuity deals, Aon Hewitt said. More of these large longevity risk transfer transactions are under consideration and Aon Hewitt suggests we watch this space.

In terms of smaller longevity swaps, Aon Hewitt cites the example of the £400m Bentley pension fund longevity swap, which showed that the hedging route was accessible to smaller pension schemes.

Aon Hewitt notes that such smaller pension schemes will be encouraged by ongoing developments in the longevity swap market, with providers working on ways to simplify and standardise offerings aiming to reduce the minimum longevity swap deal size to as low as £50m.

While the longevity swap market looks set to open up to smaller pension schemes in future, the market is currently able to support much larger deals due to the substantial amount of capacity available for longevity reinsurance and risk transfer.

Aon Hewitt says that new reinsurers entering the longevity market are supporting this growth, with over 15 reinsurers with over £500m per deal now ready to support transactions, some with more than £1 billion of capacity per deal to put to work.

This all converges to put the longevity swap and risk transfer market in good stead for future growth. Greater access to longevity risk transfer capacity, through larger annuity backed deals, smaller longevity swaps and a greater breadth of options can grow the markets potential client base.

Larger amounts of traditional reinsurance market capacity targeting longevity risk and an increased appetite to be risk takers for this market among reinsurers, means ample capital exists to soak up deals.

Add to that the fact that there are still capital markets sources of capacity for longevity risk transfer while some banks continue to work on efforts to transfer this risk to investors and the future looks busy for the longevity risk transfer market.

View our list of longevity swap and risk transfer transactions.

Also read:

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

Longevity risk transfer market to boom, experts forecast.

Reinsurers driving longevity risk transfer market pricing & capacity.

Longevity swap deal sizes expected to grow: Towers Watson.

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