The BT Pension Scheme has entered into a £16bn longevity swap to hedge more than a quarter of its exposure to longevity risk.
The deal with the Prudential Insurance Company of America, is the biggest to be seen in the UK so far, covering over three times more in liabilities than the previous record-holder.
The BT scheme, one of the UK’s largest, used a wholly-owned insurance vehicle to pass longevity risk onto the reinsurance market, instead of a traditional insurance company. Reinsurers only transact with insurers and banks, and not with pension schemes, so using this approach allowed it to access capacity in the global insurance and reinsurance market directly and achieve the best value for the scheme, the trustee said.
“Usually, a pension scheme will pass longevity risk to an insurer or a bank, which will then reinsure it. That means paying a cut to an intermediary, which will have its own requirements for the transaction,” Towers Watson senior consultant Ian Aley, who advised the BT Pension Scheme’s trustee.
“We do not expect schemes establishing their own insurers to become the standard template for transferring longevity risk. The approach made sense here because the BT Pension Scheme understands the investment techniques involved and because the transaction was so large. However, we have developed other solutions to help our clients access the reinsurance market efficiently.”
The trustee was also advised by Allen & Overy and Hogan Lovells, while Aon Hewitt worked with the sponsor.
Aon Hewitt senior partner and head of risk settlement Martin Bird said: “This transaction is the largest single UK pension de-risking deal to date and represents another step forward in terms of innovation. Together with recent large buy-in transactions for ICI and Total, the BT longevity swap underlines the continued focus on pensions de-risking and demonstrates that the market is open to the ‘mega-funds’.
“As pension schemes continue to focus on reaching a position of stability there is significant demand for such large scale capacity – and we are seeing a rapid response from the provider market with a number of new solutions available. This includes the use of captive structures which enable even the very large schemes to make risk settlement secure and affordable on such a scale.”
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