Longevity swaps outdo pension buyouts in 2009

Landmark longevity swaps done in 2009 account for most of the £4bn combined value of UK pension scheme swap deals, buyouts and buy-ins in 2009 so far, according to new figures published by Hymans Robertson.

Babcock International’s longevity swap with Credit Suisse and RSA Insurance Group’s deal with Rothesay Life, an insurance company owned by Goldman Sachs, saw the total value of this nascent market hit £2.9bn, Hymans reported in November. The news means the appetite for corporates to shift risk from their own schemes onto specialist insurers continues to grow.

Longevity swaps allow companies to sell off some of the pensioner liability in their pension scheme by trading as a swap, with a counterparty such as a large investment bank or insurance company, creating liquidity for the scheme and, converse to a buyout, allowing it to keep hold of the underlying assets.

James Mullins, a senior liability management specialist at Hymans Robertson, says that the longevity swaps market is expected to grow in the next few months as more than £1bn in deals currently being worked on come to fruition. “In addition, in view of the significant interest, particularly from large UK pension schemes, other established insurers, including Legal & General, seem likely to enter the longevity swap market in 2010,” says Mullins.

More sizeable longevity swap deals are expected to complete in Q4 2009, while there have been reports that a County Council is currently considering a longevity swap deal ­ which would be the first such contract signed with a public sector body.

“We believe that longevity hedging deals will be most common for large pension schemes which believe that the best way for them to de-risk is to carry out a DIY buy-in; that is to use interest, inflation and longevity swaps directly to reduce risk,” adds Richard Shackleton, a partner at Hymans.

Buyouts and buy-ins accounted for £1bn of the total in 2009. Both the number and the value of the deals showed a marked increase, while the two leading providers, Pension and Insurance Corporation and Legal and General, report strong demand.

Click here for our recent primer on longevity swaps