£7.8 Billion of Risk Transfer Deals Completed Last Year, More Coming in 2010

(February 17, 2010) – With retirees living longer, insurance companies have been increasingly looking for ways to transfer pension liability.

A popular solution: Longevity swaps, in which pension schemes are protected against the risk of paying for longer-living pensioners in exchange for an agreed stream of payments. Recent analysis from Hymans Robertson’s Managing Pension Scheme Risk report shows that 2009 saw about £7.8 billion of pension scheme risk transfer deals, and even more are expected this year. The research reveals 2009’s third quarter was the “highest ever” quarter for those transfers with £3.9 billion, due to longevity swap deals completed by RSA Insurance, Babcock International, and the Merchant Navy Officers Pension Fund’s £500 million buy-in.

“Pension schemes need to understand the risks inherent in their schemes and manage them appropriately,” said James Mullins, Hymans Robertson senior liability management specialist, to Professional Pensions. “Longevity is widely viewed as one of the biggest unmanaged risks they face.”

Mullins added that as pension funds are growing more desperate to mitigate risk, he expects to see £10 billion worth of deals this year alone. Signs that the popularity of longevity swaps will continue are reflected in Legal & General’s announcement today, saying it will enter the longevity insurance market immediately. Reports have suggested BMW is looking to cover £2.5 billion of liabilities in a longevity swap with Abbey Life, Deutsche Bank and Paternoster. Towers Watson reported last week that the volume for all its pension liability risk hedging broke the £40 billion mark in 2009. Its previous high was £35 billion in 2007.

“The popularity of longevity swaps is that companies can demonstrate to shareholders that they have cut their pension risks significantly, but not have to make any big upfront cash payments,” said Mullins to the Financial Times.