PRT Activity Pipeline to Swell in Next Five Years

A UK energy company has insured £2 billion of longevity risk, while a survey shows that half of major pension funds could conduct a de-risking exercise by 2020.

De-risking looks set to break more records in the coming years with two-thirds of large pensions in the UK now actively planning to offload risk.

A survey conducted by Legal & General (L&G) found that two-thirds of pension funds with more than £1 billion ($1.5 billion) in assets were considering some form of insurance de-risking arrangement.

“In the event there is more demand than supply, timing and preparation will be crucial to a successful transaction.” —Emma Watkins, LCPL&G surveyed more than 40 pensions, and found that almost half were planning a buy-in or buy-out in the next 5 years. Of those interested in offloading longevity risk, two-thirds were planning to carry out a transaction in the next five years.

Pension funds were also keen to take advantage of new UK rules for defined contribution members that allow greater flexibility with savings when reaching retirement. L&G said 40% of pensions aimed to offer their members the opportunity to transfer out of a defined benefit plan in order to access the new rules.

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The research comes as energy firm ScottishPower announced a £2 billion longevity swap transaction for its pension fund, arranged by Deutsche Bank subsidiary Abbey Life.

The arrangement saw three reinsurers take on half of the pension’s longevity risk, covering 9,000 pensioner members. The pension was able to fund the transaction from its cash reserves, meaning Spanish parent company Iberdrola did not have to inject additional cash.

James Mullins, partner and head of risk transfer solutions at Hymans Robertson, which gave actuarial advice on the deal, said the longevity swap market represented “excellent value” currently, due to high demand from reinsurers for longevity risk.

“It’s therefore highly likely we’ll see an increasing number of schemes go down this route, taking them a step closer to securing benefits,” Mullins said.

ScottishPower’s move is already the second major longevity swap of 2015, following the Merchant Navy Officers Pension Fund’s move to secure £1.5 billion of liabilities with Pacific Life Re.

“The question now becomes one of market capacity,” Emma Watkins, partner at LCP, said of the growing pipeline of demand. She estimated that the bulk annuity market would need to provide capacity of roughly £25 billion a year to meet just half the demand predicted by L&G’s survey.

“In the event there is more demand than supply, timing and preparation will be crucial to a successful transaction,” Watkins said.

Martin Bird, senior partner and head of risk settlement at Aon Hewitt, said there was “no shortage of capacity” for longevity swaps and claimed there was more than £20 billion worth of such transactions being planned for 2015.