Prudential pension scheme agrees £3.7bn longevity swap with Pacific Life Re

The Prudential Staff Pension Scheme has secured a longevity swap deal with Pacific Life Re, covering £3.7bn of pension liabilities, the fifth largest UK longevity swap on record

The transaction covers over 20,000 members’ benefits and aims to provide long-term protection for the scheme against costs that could arise from unexpected increases in life expectancy.

The scheme is M&G plc’s largest UK pension scheme and is made up of two sections - a defined benefit (DB) section and a legally segregated defined contribution (DC) section.

Its DB section, which entered the longevity swap with Pacific Life Re, is closed to new members and has around £7bn of assets and liabilities.

Its DC section is the firm’s main UK scheme for current and new employees, and has around £400m in assets.

The Prudential Assurance Company is a company within M&G plc and is the scheme’s principal employer.

The longevity swap policy forms part of the scheme’s investment portfolio and adds to a “comprehensive” programme of hedging risks.

Pacific Life Re was selected as the reinsurer following a competitive bidding process.

A Guernsey-based captive insurance company, owned by the trustee of the scheme, is providing access to the reinsurance market by writing an insurance contract by which all the longevity risk is reinsured.

Following a competitive procurement process, Artex Risk Solutions Inc. was selected to establish this captive under their ‘ready-made’ incorporated cell company, with BWCI Group providing calculation services.

“The scheme’s diligent approach to risk management resulted in longevity risk receiving close scrutiny by the trustee,” said Prudential Staff Pension Scheme chair of the trustee, Keith Bedell-Pearce.

“Following a period of investigation, the trustee has worked with our advisers to identify an optimal solution to reducing longevity risk in the scheme, enhancing the security of benefits for all members while maintaining the funding level of the scheme.”

The transaction was supported by Willis Towers Watson. Mayer Brown International LLP acted as legal adviser to the trustee, while the scheme also took legal advice from Walkers (Guernsey) LLP.

“We were pleased to be able to build on the trustee’s in-depth understanding of this type of transaction to help them achieve attractive terms that reduce risk and enhance member security,” commented Willis Towers Watson head of transactions, Ian Aley.

“By maximising competition in both the reinsurance market and between the providers of 'ready-made' captive solutions to Trustee we were able to tailor a package to suit our client’s precise requirements.”

M&G plc head of pensions and benefits, Simon Banks, added: “As an organisation we have worked over many years to support the trustee in managing risk. This transaction marks another positive step in de-risking the scheme, and providing long-term security for members, as well as providing greater certainty to M&G plc.”

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