Longevity Hedging Breaks Records in 2013

(January 2, 2014) — Hedging out the risk of pension fund members living longer than expected had a bumper year in 2013, consultants Aon Hewitt has found.

Some £8.9 billion in longevity-hedging transactions were completed by UK pension funds in the last 12 months, breaking all previous annual records.

A clutch of large deals accounted for almost £8 billion of the total—engineering firm BAE Systems took £5 billion of the amount—with a few smaller transactions making up the rest.

Aon Hewitt indicated that this development was set to continue with a “strong pipeline” of longevity transactions waiting in the wings.

Despite concerns about the lack of a capital market for longevity risk being created, the consultants said reinsurers—the ideal partners to sit on the other side of a transaction—were becoming more comfortable in the space, which had helped increase volumes.

More generally, the pension buyout or risk-transfer market was also heading for a strong year.

Aon Hewitt said a record-breaking third quarter of activity had set the market on the way to at least nudging the £8 billion transferred in 2008.

There were three main reasons for this uptick in business, aside from improving solvency levels, Aon Hewitt said. Overseas companies have turned their attention to more tricky pension problems in the UK after sorting out simpler issues abroad and inflation-linking has come up the agenda for many pensions and buying out seems to some to be an effective and less costly outcome than other options. Finally, an uptick in merger and acquisition activity has made resolving pensions issues a priority in order to seem attractive on sale.

Continuing from 2012, the market in the UK is dominated by three main providers: Pension Insurance Corporation, Rothesay Life, and Legal & General. These companies collectively were responsible for 93% of 2013 business.

Related content: What Are the Risks of Longevity Hedging? & Longevity Hedging: A Gap in the Market