The Merchant Navy Officers Pension Fund (MNOPF) has passed £1.5bn of longevity risk onto a reinsurer in a deal that has seen the fund create its own insurance company.
The transaction, which covers the longevity risk of 16,000 pensioner members, is structured as an insurance agreement between the MNOPF and a new and specially-established Guernsey-based company, MNOPF IC Limited. Upon completion, the new company entered a reinsurance deal with Pacific Life Re.
The structure of the agreement is similar to one carried out by the BT Pension Scheme (BTPS) in July last year. BTPS entered into a £16bn longevity swap by establishing its own insurer to pass the risk onto the reinsurance market with Prudential Insurance Company of America. Reinsurers only transact with insurers and banks, and not with pension schemes, so using this approach enables schemes to access capacity in the global insurance and reinsurance market directly and achieve the best value.
MNOPF chairman Rory Murphy said: “Today’s announcement is good news both for our members and employers. This innovative transaction significantly reduces the overall risk in the fund and is a positive step on our journey to achieve full funding.”
MNOPF chief executive Andrew Waring added: “Longevity was a significant, concentrated risk for the fund and, having considered the different options available, the trustee board decided that Towers Watson’s Longevity Direct structure was the most cost effective and efficient structure. This, combined with attractive reinsurer pricing, allowed us to hedge longevity risk without any material impact on our broader journey plan.”
Towers Watson acted as actuarial, investment and settlement advisers while legal advice was given by Norton Rose Fulbright.
Towers Watson senior consultant Shelly Beard said: “This transaction is an important development for the MNOPF and for the longevity hedging market in general. Towers Watson, acting as delegated chief investment officer for MNOPF, identified that longevity was a major, growing risk for the fund and we swiftly took action to analyse the risk and assist the scheme in brokering cost effective protection.”
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