Zurich & Hannover Re deliver £800m longevity swap for FTSE 100 pension

Insurer Zurich and reinsurance firm Hannover Re have delivered an £800 million longevity swap arrangement for an unnamed UK pension fund belonging to a FTSE 100 firm, protecting it against the risk of pensioners and members living longer than forecast.

Zurich acted as the insurer, entering into the longevity swap agreement with the FTSE 100 companies pension scheme, while Hannover Re provided the longevity reinsurance capacity to support the majority of the risk involved.

Hymans Robertson was the lead adviser on the transaction, working with legal transactional counsel CMS.

The pair negotiated a new and efficient structure with insurer Zurich to meet the requirements of the pension scheme in this case and to transfer risks related to ageing pensioners and dependent members of the scheme.

Most of the longevity risk involved in the swap transaction was covered by reinsurance from leading global player Hannover Re, with the pension scheme now benefiting from diversification of counterparties under an ‘Enhanced Pass Through’ structure.

Hymans Robertson said that the longevity swap transaction was unique in its demographics, covering a significant proportion of non-UK overseas lives, delivering valuable protection to the pension scheme sponsor.

The majority of longevity swap transactions have remained focused on the lives of pensioners and dependents resident in the UK, so this is a step forwards in the market that could result in more transactional activity.

Baljit Khatra, Risk Transfer Consultant at Hymans Robertson and lead adviser, commented on the deal, “The Scheme had already taken significant steps to reduce financial risks, and we identified longevity as being a material outstanding risk for the Scheme. After a thorough broking process covering reinsurance and all structuring options, we worked closely with the Trustee and Sponsor to negotiate the first ‘Enhanced Pass Through’ structure in the market. This gave the Scheme efficient access to longevity protection, whilst retaining flexibility over its future de-risking journey. The Zurich solution ticked all the boxes a captive alternative would have ticked with a number of advantages for the Scheme. Zurich’s collaborative approach led to a smooth and quick implementation despite this being a new structure with a significant proportion of overseas lives.”

James Mullins, Head of Risk Transfer at Hymans Robertson, added, “Hymans Robertson is very pleased to have helped the Trustee achieve a great outcome for the Scheme and its members. Hymans Robertson has advised on over £8bn of risk transfer deals this year, covering all types of insurance risk transfer: buy-ins, buyouts, longevity swap conversions and longevity swaps such as this transaction.”

Greg Wenzerul, Zurich’s Head of Longevity Risk Transfer, explained, “I am delighted that our solution fitted the Trustee and Sponsor’s objectives. It is a testament to all involved and the simplicity of our solution that this transaction was quick and simple to execute. This model ensures that Zurich can be competitive in the market for some of the largest transactions, while allowing schemes to benefit from the security, governance and controls associated with UK insurance companies.”

Claude Chèvre, the responsible member of Hannover Re’s Executive Board, also said, “We have successfully joined forces with Hymans Robertson and Zurich in order to provide the required risk protection to this pension scheme. As the transaction covers a significant proportion of non-UK overseas scheme members, Hannover Re was able to demonstrate its capability to act as a go-to partner for longevity solutions in an international context. The structure developed by Zurich presents an attractive alternative to the existing captive solutions. We are more than happy to support the longevity market not only with risk capacity but also with our expertise.”

A representative of the pension schemes Trustee commented, “The Trustee is delighted to have taken this positive step in reducing risk and improving the security of members’ benefits. This continues the Trustee’s strategy to de-risk the Scheme, with this transaction significantly reducing the key outstanding risk for the Scheme. Hymans Robertson’s specialist experience in the longevity insurance market was invaluable. Through their efficiency and tailored broking approach the Scheme was able to save money at each stage of the process.”

Head of Global Pensions Risk at the Sponsor explained, “This transaction supports the Trustee’s strategy to de-risk the Scheme and has been expertly led by Hymans Robertson. The terms make commercial sense for both the Trustee and for the Scheme’s sponsor. The longevity swap will provide valuable protection and support the future strategy of the Scheme.”

Key to getting these large longevity swap deals over the line is the availability of reinsurance capital, in this case provided by major player Hannover Re.

It remains the case that the global potential market for longevity risk could be significant and some ILS funds continue to look at longevity as a valuable component for life ILS fund strategies.

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