Mercer | Fifth streamlined longevity hedge

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Mercer and Zurich strike 5th streamlined longevity hedge breaking through £1 billion of pensioner liabilities traded

  • 17 January 2017
  • United Kingdom, London
  • Road ahead clear for smaller schemes to offload longevity risk, says Mercer
  • 5th deal of its kind covers £300 million of pensioner liabilities
  • Streamlined hedge arrangement to be delivered by Zurich and reinsured by SCOR

Mercer has announced that the 5th streamlined “named life” longevity hedge has been agreed between an undisclosed UK pension plan and Zurich Assurance. The transaction was completed to help manage the financial risk of the scheme members living longer than expected and complement a dynamic investment de-risking strategy as a significant step towards a “DIY pensioner buy-in”. Zurich has reinsured 80% of the longevity hedge with SCOR and retained 20%.

The hedge, structured as a “whole of life” insurance policy, will protect against the risk of rising costs as a result of the current pensioners of the pension plan living longer than expected. The hedge is “named life” meaning it covers around 2,300 named pensioners and future dependants. The total liability for these members is around £300m.  Mercer acted as the lead advisor on the transaction, covering all aspects including feasibility, provider selection, accessing reinsurance capacity, structuring, contractual terms and implementation as part of a streamlined longevity hedge platform. Zurich worked with Mercer and SCOR to establish a set of streamlined processes for operating an arrangement of this size. 

Suthan Rajagopalan, lead transaction adviser and Head of Longevity Reinsurance at Mercer, commented, “This is the fifth streamlined longevity swap executed in about a year since the first such deal was announced in December 2015. This marks the first deal, on the platform set up by Mercer, where SCOR have been awarded the reinsurance and follows on from the smallest ever such deal at £50m announced in October 2016. Before these five transactions which total over £1 billion, named life longevity hedges were exclusive to only the largest schemes with over £400m of pensioner liabilities and deal sizes averaged £2bn. These deals pave the way to competitive longevity reinsurance pricing for small and medium sized schemes which are more exposed to so-called “concentration risk” where there is potential for greater variability in members’ life expectancy due to diverse pension amounts. Mercer’s co-ordination of the project culminated in immediate reinsurance by Zurich with SCOR to minimise the longevity risk transfer cost for the Trustees. This complements a dynamic investment de-risking strategy run by Mercer for the plan so is a significant step towards a “DIY pensioner buy-in” never been achieved before for a deal of £300m pensioner liabilities.”

The Chairman of the Trustees said “The pension plan had already decided that an actual bulk annuity was not desirable in the short to medium term due to the desire to maintain rewarded investment risk exposure and for Mercer to dynamically de-risk as investment market opportunities permitted. The Trustees are pleased to seize this early opportunity to hedge longevity risk for its pensioners and their dependants. This transaction helps to improve the security of benefits for all members by removing the uncertainty of future costs to the plan arising from existing pensioners living longer than forecast. Mercer has done an excellent job in advising the Trustees and sourcing this de-risking opportunity. They have delivered an attractive outcome for the pension plan, and advised efficiently and professionally from concept to execution.”

Jim Sykes, Zurich’s Chief Operations Officer, said: “We're delighted to be announcing another longevity hedge, just a few months after our last transaction. This deal demonstrates how using a panel of reinsurers really does provide competitive pricing for smaller liability transfers, and we are very pleased SCOR is our reinsurance partner this time. With five hedges announced in just over a year, our longevity business is a growing and complementary part of our Corporate Business, demonstrating our ability to retain longevity risk and deliver pensions solutions to a rapidly increasing number of employers.”   

Rupen Shah, SCOR’s Global Head of Longevity, said, “SCOR’s large portfolio of mortality risk positions us as a natural holder of longevity risk.  We are delighted to have secured our first transaction under the streamlined longevity swap platform Mercer has set up with Zurich. This diversifies the deployment of SCOR’s appetite for longevity risk alongside reinsurance of insurer annuity business and “traditional“ longevity swaps for larger pension scheme and positions SCOR well for future streamlined longevity swaps.”

Dave Robinson, Principal at Mercer and Scheme Actuary for the pension plan, added, “In common with many trustees, the plan trustees hedge a significant portion of their interest rate and inflation risk, but until now have not been able to hedge any of the mortality risk without looking to the buy-in markets.  The opportunity to cap their potential mortality exposure in the context of uncertain future medical improvements and observed life expectancy improvements over the last 25 years or so, at a limited premium to the level of the plan’s Technical Provisions was compelling.  In addition, the longevity hedge transfers this risk, without requiring the payment of an upfront premium.  This allows the pension plan to retain full investment flexibility, a key consideration for the Trustees.”

“Competition and appetite in the longevity reinsurance market is strong and there are attractive deals for pension funds to secure. The pipeline for streamlined longevity hedges and also traditional insurance structures is strong and there continues to be innovation to increase the range and efficiency of options to manage longevity risk,” says Mr. Rajagopalan, Mercer. “These include ‘captive’ or ‘pass-through’ structures for larger schemes – all of which aim to reduce costs and increase flexibility where scale supports this.”

Notes to Editors
A ‘DIY Pensioner buy-in’ is a where a Trustee transacts key elements underlying a pensioner bulk annuity insurance policy itself such as longevity, rates and/or inflation hedging. Each element can be conducted at the scheme’s own pace and it potentially also allows retention of some investment risk and reward. This is could be a long term alternative to a fully insured pensioner bulk annuity or a stepping stone to it.

About Mercer
Mercer is a global consulting leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and careers of their most vital asset – their people. Mercer’s more than 20,000 employees are based in 43 countries and the firm operates in over 140 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global professional services firm offering clients advice and solutions in the areas of risk, strategy and people. With annual revenue of $13 billion and 60,000 colleagues worldwide, Marsh & McLennan Companies is also the parent company of Marsh, a leader in insurance broking and risk management; Guy Carpenter, a leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a leader in management consulting. For more information, visit www.mercer.com. Follow Mercer on Twitter @Mercer. In the UK, Mercer Limited is authorised and regulated by the Financial Conduct Authority.

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