The UK's first longevity swap could be a wolf in sheep's clothing, harbouring problems for pension schemes looking for full buy-outs in the future, warns Occupational Pensions Trusts (OPT).

The landmark deal, struck between Credit Suisse and engineering group Babcock, could spark a trend of longevity swaps in the market, which Ben Shaw, development director at OPT, says could be exacerbated by the current conditions in the buy-out markets.

"The buy-out market has lost one of its main players in Paternoster and the competitive pricing environment of 18 months ago has vanished, so it is natural for the focus to turn to longevity swaps as an alternative," Shaw said.

"But companies should heed advisers who recommend that they be treated with caution and who point to the market's relatively limited expertise in such deals - this is new territory and there is no roadmap.

"The present drop-off in the buy-out market is likely to be temporary but rushing into a longevity swap could create real problems for those pension schemes aiming for a full buy-out sometime in the future. For example, scheme trustees should question whether the buy-out company would take any account of such an asset?"

Counterparty risk remains a problem, he added, questioning whether it will be around to pay out in the latter years. "This would mean scheme members not receiving the benefits of all of the earlier premiums paid in, or the protection they believed they had. So before committing to a longevity swap deal, trustees should stop and ask whether they are ready to commit to a risk of 50 years or more with a single bank or other institution - regardless of how strong it might look today."

- Pensions Age June 2009

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