New life to longevity market

The pension scheme longevity insurance market had its busiest year in 2013, both in terms of volume and size of transactions, with six deals completed worth a total of circa £9 billion. This is significantly higher than the previous highest year, 2011, where £7 billion of longevity deals were completed.

The past year also featured another record, when the largest-ever pension scheme longevity insurance deal between Legal & General and the BAE Systems 2000 Pension Plan was completed in February.

The £3.2 billion arrangement insured the pension plan against the financial risk of its 31,000 current pensioners living longer than expected. Legal & General retained 30 per cent of the longevity risk, with the remainder being reinsured by Hannover Re.

The other five arrangements put in place in the market ranged in size from £400 million to £2.5 billion.

As market practitioners, including insurers and advisers, have become more experienced and implementation processes more streamlined, longevity insurance is set to become more accessible for smaller-sized schemes. Leading the way on this is Legal & General who has developed a solution specifically aimed at schemes with liabilities under £250 million.

In order to provide this, Legal & General has removed much of the complexities that are necessary for deals with larger schemes. For instance, the need for collateral arrangements has been removed, along with the need for back to back reinsurance, as Legal & General can retain all the risk. By simplifying the arrangement, Legal & General estimates that the implementation process can be completed in three months, instead of the five to six months it typically takes for a larger arrangement.

Unlike other longevity insurance solutions for smaller schemes already on the market, payments to the scheme under Legal & General’s solution reflects the mortality experience of the scheme members, so providing an accurate hedge against longevity risk. This is in contrast to index-based solutions where payments are linked to general population experience.

In addition, the terms of this longevity solution allow it to be easily converted into a buy-in in future. This flexibility will allow schemes to remove a key risk early in their de-risking journey allowing them to focus on managing assets towards longer term objectives such as buy-in or buyout.

Legal & General head of bulk annuities and longevity insurance Tom Ground explains: “Even where scheme funding positions improve, the spectre of longevity risk always looms – the cost of people living longer can easily negate asset returns. Pension schemes of all sizes have to manage this risk and Legal & General is able to offer the flexibility to make longevity insurance available to any size scheme – both large and small.”

Despite all schemes being exposed to longevity risk, smaller schemes can be more greatly affected by the mortality experience of their members relative to a population based index as just a few key pensioners living longer than expected can have a significant impact on their funding position. The complexities surrounding longevity insurance have meant that the solution has so far been the preserve of larger schemes with others having to bear longevity risk or consider different solutions such as buy-ins. However, by simplifying the process, Legal & General is helping to make longevity insurance available to a wider market. This can only help to grow the market beyond 2013’s record-breaking year.

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