It is only a matter of months before UK pension schemes decide to invest in longevity swaps to protect against their members living longer, predicts Watson Wyatt.

The financial consultant said there are already a number of life insurers that have transferred longevity risk either to a reinsurer or to investors, but no transaction that directly removes mortality risk from the occupational pension scheme other than annuity contracts has yet surfaced in the sector.

However, Watson Wyatt confirmed that it is advising a number of companies and trustees on how best to hedge their mortality risk, and providers or mortality swaps and insurance companies have reported that they have issued quotes to more pension schemes in recent months, and have a potential deals on the horizon.

"Longevity swaps allow schemes to protect themselves against unanticipated improvements in life expectancy," said John Ball, head of defined benefit pension consulting at Watson Wyatt, at a Westminster and City Conference. "Until recently, the market price anticipated much higher life expectancy than schemes were allowing for in their funding reserves. That made swaps look like an insurance policy with a high excess charge. But the gap has narrowed as schemes are starting to set more cautious assumptions and greater competition is developing among the providers, so cost will be less of an obstacle for many pension funds."

Despite swap prices being as unpredictable as longevity itself, the firm is confident that current prices could reflect competitive pressure. "We saw with pension buy-outs that providers are very keen to plant their flags in the ground when a market appears to have significant growth potential. The same forces are a work here, so the pension schemes which move early may get the best deals," Ball said.

- Pensions Age April 2009

Share Story: