The BT Pension scheme broke new ground last week with the completion of its £16bn longevity swap.
Not only was the deal more than three times larger than the £5bn Aviva transaction – until this week the biggest longevity swap to be seen in the UK – but it used an innovative approach to take its business directly to the global reinsurance market in a bid to cut costs.
Traditionally, pension funds have been required to hedge longevity risk with a bank, who then deals with the reinsurer at the other end of the deal. Instead, BT cut out the middleman and set up its own insurance company, BTPSI (No 1) IC. Through this company it has reinsured the risk with US-based Prudential Insurance Company of America.
Although a similar method was used in the Aviva deal, the BT swap marked the first time such a scheme was used outside the insurance industry.
Given the size of the deal and the in-house investment knowledge at the BT scheme, setting up a wholly-owned insurance company was a smart move: it removed a layer of cost and also meant there was no intermediary attempting to limit the amount of risk passed through its balance sheet.
But while the method is unlikely to be replicated by many smaller schemes, it highlights the innovation at work in the industry. The proactive approach to transferring risk is already well under way and providers are busy to come up with products to make insurance easier to access. More than £9bn of de-risking transactions were completed in the first quarter of this year and the total volume of liabilities covered by buy-ins, buyouts and longevity swaps is predicted to exceed £30bn this year, with ever-bigger sums being covered. The £5bn Aviva pension fund’s longevity deal in March came just weeks after the £3.6bn ICI Pension Scheme’s £3.6bn buy-in, which was spread over two different insurers.
The £40bn BT scheme, the largest corporate defined benefit plan in the UK, has now topped the lot with its £16bn swap.
“Until recently, it would not have been possible to hedge anything like this much longevity risk in one go,” says Ian Aley, a senior consultant at Towers Watson who advised the BT Pension Scheme’s trustee. This transaction is three times bigger than anything a UK pension scheme has put in place before, and that record was only set this year. A strong appetite from reinsurers means that very large deals are now possible.”
In the absence of a flu pandemic or similar catastrophic event coming along and wiping out the elderly, longevity is a growing risk which schemes are increasingly eager to protect themselves against. Fortunately, there is an ever-increasing array of options to help them do so.
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