Competitive longevity hedge for smaller and mid-sized UK DB

Competitive longevity hedge for smaller and mid-sized UK DB

First competitive longevity hedge for smaller and mid-sized UK DB pension schemes

  • 14 July 2014
  • United Kingdom, London

Mercer and Zurich launch first competitive longevity hedge for smaller and mid-sized UK DB pension schemes

  • Unique longevity hedge aimed at DB schemes with pensioner liabilities of £50 million+
  • Forms part of new Mercer SmartDB service offering bespoke de-risking and fiduciary management services
  • Mercer SmartDB launch expands de-risking options for UK DB schemes of all sizes


Mercer, the pensions, investments and employee benefits consultancy, and Zurich, the global insurer, have launched the UK’s first competitively-priced longevity hedge accessible to the majority of the UK’s defined benefit (DB) schemes.

Having originally brought a fiduciary management Dynamic De-risking Solution (MDDS) to the market in 2009 to address the implementation difficulties associated with sophisticated de-risking journey plans, Mercer are now bringing that same scale and operational efficiency to the longevity hedging market. The longevity hedge implementation (“Streamlined Longevity Solution”) is the first of its type in the country, with its associated panel of re-insurers. It is aimed at UK DB pension schemes with pensioner liabilities of £50m or more.

“Demand for DB de-risking solutions is increasing,” said Alan Baker, Mercer’s UK Head of DB Risk, “Combining longevity hedging with our successful fiduciary management service, this is an innovative, practical step opening up a cost-effective DB de-risking approach to schemes of all sizes. It’s a lower risk, higher return solution compared to alternatives like a pensioner buy-in. We have pre-agreed hedging terms with a panel of reinsurers fronted by Zurich, to allow clients access to the best prices because getting them competitive deals is crucial. It’s unique and we’re delighted to offer it in partnership with such a well-known global insurer.”

These services can also be combined with actuarial, administration and governance services as part of the new Mercer SmartDB service.

Historically, the complexity and advisory costs of a longevity hedge - where an insurer assumes the longevity risk and cost of a section of a pension scheme’s members in return for a premium - have meant that their use in pension scheme de-risking has been restricted to larger DB schemes of typically £1 billion plus of liabilities. Insurers and reinsurers have found quoting on smaller schemes prohibitive due to the high transaction costs involved and the complexity of each bespoke deal. The hedge - and the other services provided within Mercer SmartDB - means that UK DB pension schemes of all sizes now have more de-risking options open to them.

Simon Foster, Head of Corporate Life and Pensions, UK and International Savings, Zurich, said: “We are delighted to be working with Mercer and our reinsurance partners to bring this solution to smaller and mid-size DB schemes, for which longevity hedges were not previously easily available.

“DB pensions have been facing significant funding challenges in recent years from people living longer and uncertain economic conditions. As a result, most have closed to new members, and many have stopped future accrual, with the focus now moving to stabilise existing liabilities. Given the clear market need, and Zurich's strategic focus on providing innovative solutions for corporate customers to better manage their risks, this is a natural extension to our UK proposition.”

According to Dan Melley, Mercer’s UK Head of Fiduciary Management, “Most organisations are faced with two options: manage the risk on the balance sheet or transfer it in full, with a significant premium cost. Whilst each option will rightly have its place with many companies, our SmartDB solution provides a third way. Organisations of all sizes can now access a more complete hedging and governance solution, eliminating many of the risks at more manageable cost.  Extending our capabilities to include a longevity hedge will greatly assist our clients as they seek to manage the risks of their DB liabilities.”

Notes to Editors
A longevity hedge, together with a low risk portfolio, is economically similar to a buy-in but the assets, rather than being passed to the insurer, remain with the scheme. This allows unfunded schemes more assets for use in their efforts to reduce their deficits.  De-risking options like longevity hedges, buy-outs and buy-ins have proved too expensive for many schemes other than the larger DB schemes. This is because, until now, insurers have historically provided less favourable hedging pricing for small schemes due to less credible data to base their pricing on and hence additional margins need to be added. The standardized processes and ease of execution involved in the Streamlined Longevity Solution have led reinsurers to commit to eliminate unnecessary margins. Longevity hedges offer substantial de-risking at a lower cost than a buy-out, where the premium is usually paid up front and in full.  The nature of a longevity hedge is that the premium is spread across the contract duration, often 25-30 years, aiding cash flow and retaining investment flexibility and upside potential for smaller companies.  Over the past few years, the consultancy has been involved in numerous longevity swaps including Carillion (December 2013), Rolls-Royce (November 2011), ITV (August 2011) and Pall (February 2011).

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.

About Zurich
Zurich in the UK
Zurich provides a suite of general insurance and life insurance products to retail and corporate customers. The UK General Insurance division supplies personal, commercial and local authority insurance through a variety of distribution channels. Zurich’s UK Life business* offers a range of personal protection, pensions and investment policies available through financial intermediaries.  UK life also provides protection and pensions policies for the corporate market available through employee benefit consultants.  Based at 21 locations all across the UK - with large sites in Birmingham, Cardiff, Farnborough, Glasgow, London, Swindon and Whiteley - Zurich employs approximately 7,000 people in the UK.

Zurich Globally
Zurich Insurance Group (Zurich) is a leading multi-line insurer that serves its customers in global and local markets. With more than 55,000 employees, it provides a wide range of general insurance and life insurance products and services. Zurich’s customers include individuals, small businesses, and mid-sized and large companies, including multinational corporations, in more than 170 countries. The Group is headquartered in Zurich, Switzerland, where it was founded in 1872. The holding company, Zurich Insurance Group Ltd (ZURN), is listed on the SIX Swiss Exchange and has a level I American Depositary Receipt (ZURVY) program, which is traded over-the-counter on OTCQX. Further information about Zurich is available at www.zurich.com.

*Zurich’s UK Life business is operated primarily through two entities: Zurich Assurance Ltd and Sterling ISA Managers Ltd.   Zurich Assurance Ltd is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.  Sterling ISA Managers Limited is authorised and regulated by the Financial Conduct Authority.

The findings, ratings and/or opinions expressed herein are the intellectual property of Mercer and are subject to change without notice. They are not intended to convey any guarantees as to the future performance of the investment products, asset classes, or capital markets discussed. Past performance does not guarantee future results. This does not constitute individualized investment advice.

Information contained herein has been obtained from a range of third-party sources. While the information is believed to be reliable, Mercer has not sought to verify it independently. As such, Mercer makes no representations or warranties as to the accuracy of the information presented and takes no responsibility or liability (including for indirect, consequential, or incidental damages) for any error, omission, or inaccuracy in the data supplied by any third party.

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