Younger Workers Covered for First Time in Longevity Swap, JP Morgan Claims

(February 1, 2011) – The Trustees of Britain’s Pall Pension Fund have hedged £70 million (US$113 million) of longevity risk with JP Morgan – and not for already-retired workers.

In what the bank (plus deal-structurer Schroder and consultant firm Mercer) claims as a first, the longevity swap – where a pension offloads its longevity risk onto a third party – is the first where younger and current employees are covered, according to Reuters. Previous longevity deals (such as the one executed by German car-maker BMW and engineering group Babcock) dealt with older and retired workers. The risks involved in insuring against younger workers outliving an actuarial table’s predictions are considered higher than those of older workers – and thus the novel nature of this deal.

While the amount hedged pales in comparison to the £8 billion in hedge longevity since 2006, the new structure of the deal is likely to interest both pension funds and vendors who will potentially pitch them such structures.

According to a Reuters report, the hedge was based on the bank’s LifeMetrics index, which measures mortality rates in various European countries, including England and Wales. The Pall Pension agreed to buy into the index, with the central negotiation of the deal focusing on how long the general population of England and Wales – as opposed to the specific employees covered by the fund – would be expected to live ten years from now. If the index is higher in ten years, the bank must pay the pension a set amount; if the index is lower at that time, the opposite occurs.