Tire Maker Strikes £600M Double Longevity Swap

The deals could open up the smaller end of the market to longevity reinsurance, argues Mercer.

Zurich Assurance has struck two longevity swap deals with tyre manufacturer Pirelli worth £600 million ($789 million).

The deals are “streamlined” longevity hedges, protecting two UK-based pensions run by Pirelli against the risk of 5,000 named members living longer than expected. Pacific Life Re provided the reinsurance facility.

Mercer, the lead advisor on the transactions, has a standardized contract agreed with Zurich for such transactions, speeding up the process for smaller deals.

“Often you have 100 pages or more in these contracts, so there is often a lot of debate,” said Andrew Ward, head of longevity risk management at Mercer. “There can be value in getting bespoke terms for larger transactions. We’ve tried to get the best terms from those larger deals upfront.”

The transaction is the second Mercer has conducted through the standardized contract arrangement, the first being a £90 million deal struck roughly six months ago. No further details of this have been made public.

Earlier this month ScottishPower completed a deal worth $1.3 billion, its second multi-billion longevity swap in the past two years. Other well-publicized swaps include a $3.7 billion transaction for Heineken’s UK pension 12 months ago and a $2 billion arrangement for the Merchant Navy Officers’ Pension Fund in January 2015. The largest to date remains the BT Pension Scheme’s $21 billion transaction, completed in July 2014.

Ward said longevity swaps were previously accessible “for only the largest schemes, but this deal illustrates that competitive longevity reinsurance pricing is now achievable for small and medium sized schemes.”

Longevity could be a bigger risk to smaller pensions, Ward said, as they are “more exposed to concentration risk resulting from a greater variability in members’ life expectancy due to diverse pension amounts in smaller populations.” He said there were further small longevity transactions currently being planned, “including one of around £50 million of pensioner liability.”

As well as reducing the complexity of negotiations with insurers and reinsurers, the standardized terms also strip out the need to collateralize the swap, as is common practice with large deals.

“Significant steps have already been taken to manage other risks in the funds,” said Tony Goddard, pension manager at Pirelli. “We are pleased to continue this process with these transactions and to seize the early opportunity to hedge longevity risk. The longevity swaps help to improve the security of benefits for all members by removing the uncertainty from members living longer than forecast. They also allow us to retain future investment flexibility.”

Related: Longevity Improvements Hit the Brakes & The Hidden Cost of Longevity Swaps