An Outcome of Longer Lifespans: Death Derivatives

Banks are now forming death derivatives to help pension funds better manage longevity issues.

(May 17, 2011) — Goldman Sachs, Deutsche Bank, and JPMorgan Chase & Co. want to help investors bet on people’s deaths, Bloomberg is reporting.

According to the news service, pensions are purchasing insurance against the risk of their members living for longer than anticipated. Yet, it has become increasingly difficult to find buyers willing to take that risk, packaged in the form of bonds and other securities. JPMorgan and Prudential have set up a trade group to establish a secondary market for longevity risk, while Goldman Sachs and Deutsche Bank have created insurance companies that promise to pay pensions if retirees live beyond a certain age, Bloomberg reported.

Schemes are increasingly transferring risk to insurance companies, driven by merger and acquisition activity, a growing number of closures and part-closures of defined benefit pension schemes, and concerns over longevity risk. A March report by Hymans Robertson has shown that UK pension buyouts, in which an entire scheme is passed to a specialist insurer, are becoming more and more prevalent.

“An increase in mergers and acquisitions activity is driving this,” James Mullins, head of buy-out solutions at Hymans Robertson, told the Financial Times. “Any potential purchaser will welcome a company that has already done a deal to transfer risk to an insurer. There is less to worry about,” he said, noting that concerns over longevity risk coupled with a greater number of closures and part-closures of defined benefit pension schemes have fueled the trend.

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A recent example illustrating the growing popularity of risk transfer deals is the Pension Insurance Corporation’s (PIC) decision in February to reinsure $799 million of longevity risk to better manage risk and more effectively compete for new business.

Similarly, in January, Swiss Re, the giant European-based reinsurer, decided to transfer $50 million in longevity risk. The investors in the Swiss Re deal were largely pension funds and other insurers.



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

Canada's Big Banks and Pensions Bid for TMX

A consortium of nine Canadian banks and pension funds are bidding for TMX Group, the exchange operator.

(May 17, 2011) — A consortium of four of Canada’s six largest banks and five large pension funds have placed a $3.7 billion rival bid for the operator of the Toronto Stock Exchange (TSE).

The group of financial companies — dubbed Maple Group Acquisition Corp. — said they have submitted a proposal to the board of TMX Group, which operates the Toronto Stock Exchange, worth about 20% higher than the opposing London Stock Exchange (LSE) bid.

Maple’s investors, according to The Washington Post, include: Alberta Investment Management Corporation, Caisse de depot et placement du Quebec, Canada Pension Plan Investment Board, CIBC World Markets Inc., Fonds de solidarite des travailleurs du Quebec, National Bank Financial Inc., Ontario Teachers’ Pension Plan Board, Scotia Capital Inc. and TD Securities Inc.

“The Board of Directors of TMX Group, in accordance with its fiduciary duties and with counsel from its financial and legal advisers, will fulfill its legal responsibility and will evaluate the proposal,” TMX said in a statement issued soon after one by Maple Group.

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TMX said the Maple proposal “is not binding and was prepared for discussion purposes,” and involves “a number of significant conditions, including regulatory approval for the combination of TMX Group with both Alpha Group and CDS Inc., but does not specify the means for satisfying these conditions.”

“We believe that on completion of that review, the applicable provisions of the Competition Act will be satisfied,” said Luc Bertrand, Maple Group spokesman and vice-chairman of National Bank of Canada, a large TMX shareholder, the Wall Street Journal reported. While pension funds would own 35% of the new entity, the bank-owned dealers would own 25%, with the remaining 40% held by the public. Meanwhile, No single shareholder would own more than 10% of TMX, in line with regulations.



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

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