Record Longevity Deal for Multi-Billion Pension

The largest ever deal is struck to insure against the improving longevity of pensioners in the UK.

(February 21, 2013) — The largest deal to insure against pensioners’ longevity improvements has been signed by a multi-billion pound pension fund in the United Kingdom.

Engineering giant BAE Systems has signed a deal to insure against the financial risk of its 31,000 pensioners, who are already receiving benefits, living longer than its current estimations.

The deal, which covers £2.7 billion in liabilities, has been signed with Legal & General (L&G). The insurer will retain 30% of the longevity risk and the rest is to be reinsured by Hannover Re.

In December, LV= announced a deal to insure £800 million of its pension fund with Swiss Re, it was only the second deal of the year and took the total business written in 2012 to £2.2 billion.

Today’s announcement takes the total business in 2013 beyond that figure already.

L&G and Hannover Re have been some of the most active in the longevity swap sector. Last year they worked on a £1 billion deal with UK chemicals firm Pilkington. However many worry that there remains too little capacity for a properly functioning capital market to launch. For the moment, reinsurers are the only companies that are willing and able to take on this risk. Until the risk becomes as tradable as other factors that impact pension funds – such as interest rates and inflation – transferring the threat of improved longevity will stay the domain of these large financial institutions.

This means longevity risk is still one of the biggest headaches for pension funds. A year ago, actuary organisation The Actuarial Profession used figures from the UK’s Office for National Statistics to work out that the rate of mortality slowed by 4% in 2011. This meant 20,000 fewer people died in the UK than would have been expected.

A report from the Organization for Economic Co-operation and Development (OECD) in June said governments must raise retirement ages and encourage the expansion of private pension coverage to adjust for increasing longevity and volatile markets.

Related story: It’s the Demographics, Stupid!  From aiCIO Magazine’s June Issue: A column from Dr. David Blake, professor of Pension Economics at Cass Business School, on longevity risk.

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