British Airways Offloads £1.3 Billion of Longevity Risk

(December 20, 2011) — British Airways has announced a £1.3 billion longevity trade, taking its hedge on increasing life expectancy to 40% of pensions in payment —  a reflection of the burgeoning activity in pension risk transfers.

The firm’s Airways Pension Scheme (APS) entered into the buy-in deal with Rothesay Life to insure against scheme members’ increasing benefits. Towers Watson advised APS on the longevity strategy. The deal marks the second time Rothesday has insured APS longevity risk, as it provided a further £1.3 billion insurance in June 2010 for 20% of APS’ pensions in payment. 

Paul Spencer, Chairman of the Trustees of the Airways Pension Scheme, commented; “One of our principal objectives is to make members’ pensions more secure. Most of our investments aim to produce an income that closely matches the pensions we expect to pay, but this still leaves the risk that longevity could improve faster than we have budgeted for. We identified an opportunity to further protect the Scheme against some of these extra costs and, after thoroughly reviewing options with our advisers, selected Rothesay Life again based on their ability to structure a contract around our needs.”

Keith Satchell, Chairman of Rothesay Life, added: “We are very pleased that we have been able to work with the Trustees again to insure additional benefits against increasing life expectancy. We believe this extension further demonstrates Rothesay Life’s expertise in designing and executing solutions. This is the second repeat trade for Rothesay this year, which we believe is a real endorsement of the team.”

Further evidence of the reflection in the uptick in activity in pension risk transfers, primarily in the United Kingdom, comes from Prudential’s longevity reinsurance transaction with Deutsche bank, conducted earlier this month. 

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, consultants and others in the industry told aiCIO. In terms of deals, de-risking volume is roughly five times greater in the UK compared to the US, and in terms of longevity-only transactions, there have been 10 such deals completed in the UK, with 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.