(December 7, 2011) — Prudential has completed its third longevity reinsurance deal and its biggest deal to date — a longevity transaction with Deutsche Bank — adding to the divide between the de-risking markets of the United States and the United Kingdom. 

Prudential Retirement, a business unit of Prudential Financial, has announced the successful completion of a key longevity reinsurance transaction with the Frankfurt-based lender, focusing on reinsuring scheme risk derived from the UK market. Under the terms of the transaction, Prudential Retirement will be one of several reinsurers of longevity risk to Deutsche Bank and its client, the Rolls-Royce Pension Fund. Prudential’s transaction covers pension liability values of approximately £500 million GBP, over $784 million US dollars, according to the firm. 

The buy-in/buy-out market is still substantially more developed in the UK compared to its US counterpart, magnified by regulatory and accounting reform. In terms of deals, de-risking volume is roughly five times greater in the UK compared to the US. In terms of longevity-only transactions, there have been 10 such deals completed in the UK, and none in the US, according to Amy Kessler, senior vice president and head of Prudential’s Longevity Reinsurance business. The number of such pension risk transfer deals in the UK market has been growing in recent years as pensions seek to transfer their risk to banks and insurers. Pension consultancy Hymans Robertson showed in a May study that with $7.2 billion (£4.5 billion) of risk transfer deals completed last year, the second quarter of 2011 looks to be a record quarter for the number of buyin and buyout deals completed in the UK. James Mullins at Hymans stated in a release that by the end of 2012, one in four FTSE 100 companies would have completed either a buyout or a buy-in.

“In the United States, we see a tremendous amount of awareness on the need to de-risk,” Kessler told aiCIO. “But there’s an affordability gap compared to the UK where pension plans are closer to fully funded. Nevertheless, we expect to see transaction volume in the US growing,” she said, noting that falling interest rates, market volatility, increasing life expectancy, and accounting and regulatory changes are prompting plan sponsors, around the world to explore available options to manage their exposure to risk and protect their balance sheets. 

“We’ve demonstrated the depth of our capabilities to bring de-risking strategies to the US,” Kessler told aiCIO, referring to the firm’s first US buy-in in May, when Prudential Retirement completed a $75 million pension risk transfer. North Carolina-based Hickory Springs Manufacturing Company selected Prudential’s Portfolio Protected Buy-in to complete the pension risk transfer transaction.

The UK has been well ahead of America in terms of these types of deals, Phil Waldeck, Prudential’s SVP for Pension Risk Management Solutions unit, told aiCIO in July, referencing the Hickory Springs’ deal. “They had large benefit figures…and more teeth in their funding requirements—so it’s not surprising that they’d be earlier to go down the de-risking path.” This is a common story. Liability-driven investing (LDI)—often seen as a precursor to pension buyouts and buy-ins—was prevalent in Europe when only a handful of American plans had adopted it. Fiduciary management—or, as Americans usually call it, investment outsourcing—follows the same storyline. Pension buy-ins then, can be viewed as another European import. “In 2012, the Pension Protection Act will force companies to write big checks for their pensions,” said Dylan Tyson, SVP at Prudential Retirement. “As they do, companies will ask themselves, for example, ‘am I a pension fund, or am I a car manufacturer?’ It’s not a question of if these types of deals will accelerate, but when—the regulatory pressure is just too great.”

Read an aiCIO Magazine article on pension buy-ins here.