While the recent completion of the £16 billion BT Pension Scheme longevity swap, a record sized transaction for the growing longevity swap and risk transfer market, showed the market’s appetite for this risk it may not be indicative of its future.
Aon Hewitt, the retirement, human resources and health solutions arm of broker Aon plc, said that while these large deals have dominated the longevity swaps market the future will see smaller pension funds or schemes increasingly tapping the market.
Marin Bird, a senior partner and head of Risk Settlement at Aon Hewitt said; “The BT pension scheme deal was an exciting one for those involved in the longevity swap market, increasing by £11 billion the previous largest deal. But it may not be indicative of where the market is going next.”
Since 2009 Aon Hewitt counts 19 longevity swap transactions, ranging from the massive recent BT deal down to the smallest to date, the £400m Bentley Motors pension scheme swap. The size of transactions has been driven by cost, appetite and also the available capacity and appetite for assuming longevity risk, particularly in the global reinsurance market.
At some point the reinsurance market will have its fill of longevity risk, it cannot keep assuming longevity exposures without a risk transfer pipeline to pass those on to someone else, perhaps the capital markets in future. The reinsurance market appetite for assuming longevity risk appears to be moving towards supporting smaller transactions.
Martin Bird explained; “It certainly demonstrated just how much capacity exists within the reinsurance market but that appetite is now trickling down and into the territory of smaller sized schemes, most of which are seeking to derisk and increase stability. It’s not yet a market with a standardised approach but it’s definitely more accessible. In any case, if a longevity swap becomes too standardised it may also become less effective a hedge.”
Smaller deals and more standardised transaction terms would attract smaller pension funds to enter into longevity hedges, making this market much more accessible and affordable to enter. For reinsurers this would make the assumption of longevity risk easier, perhaps offering more diversification if some of those deals can come from different countries as well (at the moment the market is UK dominated).
“I believe we could be seeing deals of around £50 million as we get into the final quarter of this year, a movement led by smaller schemes tapping into the funds available in the market and capitalising on the knowledge gained from the big deals. It’s early days for the core market participants to offer real competitive pricing tension – but the capacity is there, Bird continued.