- Successful transaction resulting in the removal of longevity risk and a reduction in deficit
- Swap covers £2bn of pensioner liabilities
Mercer, as lead advisor to SPPS Trustee Limited (the “Trustee”), announces today that a longevity swap has been agreed between the ScottishPower Pension Scheme (the “Scheme”) and Abbey Life Assurance Company Limited (“Abbey Life”), a wholly-owned subsidiary of Deutsche Bank AG.
This longevity swap, structured as an insurance policy, will hedge against the risk of rising costs as a result of the current pensioners of the Scheme living longer than expected. The swap covers around 9,000 pensioners with a liability of around £2bn. Mercer acted as the lead advisor on the transaction, covering all aspects including feasibility, provider selection, accessing reinsurance capacity, structuring, contractual terms and implementation.
Andrew Ward, Head of Longevity Swap Consulting at Mercer, commented, “We’re delighted to have helped the Trustee manage their risks in this way. Future life expectancy remains extremely difficult to predict. Through this transaction, we have significantly reduced this uncertainty for the Scheme while also securing very competitive pricing and robust security terms. Global reinsurers are the ultimate destination of the risk for longevity swaps. As part of this transaction, we managed a highly competitive bidding process involving a broad range of established and new reinsurers. As a result, it was ultimately possible to remove the risk at below the level of the current funding assumptions thereby achieving the holy grail of reducing both risk and deficit.”
Mr Ward continued, “This is another example of a trustee and sponsor looking to capitalise on the opportunity to manage the risk associated with longevity. The implementation of this swap will help ScottishPower reduce the long-term volatility of their pension costs in an efficient manner - an approach that is encouraged by Ofgem, the UK Energy Regulator.”
Trustee Chairman, Peter Thompson of BESTrustees, said: “This is a welcome step in the management of the Scheme’s liabilities which helps to improve the security of benefits for all members by reducing risk. Mercer has done an excellent job advising the Trustees. They have run a clear and well-structured process which has resulted in a very favourable outcome for the Scheme.”
Steven Blackie, Mercer Partner and investment adviser to the Scheme, added, “This is another measure implemented as part of ScottishPower’s long-term strategy to reduce pension risk, enhance the security of members’ benefits and increase certainty over future costs. This follows the introduction of funding level triggers during 2014 to manage down risk over time.”
“The last year has been an exciting time for longevity risk management,” concluded Mr Ward. “There are now a wide variety of techniques available to access the market including intermediary approaches such as that used for the Scheme; captive approaches and streamlined solutions which have opened up this market for smaller schemes. Trustees should consider their own circumstances to decide which, if any, approach is right for them. We expect to see continued activity in this market with 2015 likely to challenge 2014, which was itself record breaking in terms of the total volume of liabilities hedged.”
About Mercer
Mercer is a global leader in talent, health, retirement, and investments. Mercer helps clients around the world advance the health, wealth, and performance of their most vital asset – their people. Mercer’s more than 20,000 employees are based in 42 countries and the firm operates in more than 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy, and human capital. With over 55,000 employees worldwide and annual revenue exceeding $12 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting. For more information, visit www.mercer.com. Follow Mercer on Twitter @MercerInsights. In the UK, Mercer Limited is authorized and regulated by the Financial Conduct Authority.