THE Scottish Power Pension Scheme has entered into a swap with Abbey Life to hedge the longevity risk associated with £2bn of liabilities
The transaction covers approximately 9,000 pensioners and half of the scheme’s liabilities, Professional Pensions reports.
Lead adviser on the deal Mercer said the scheme ran a “highly competitive bidding process” involving established and new reinsurers.
Mercer head of longevity swap consulting Andrew Ward said: “As a result, it was ultimately possible to remove the risk at below the level of the current funding assumptions thereby achieving the holy grail of reducing both risk and deficit.”
He said the deal demonstrated that trustees and sponsors were looking to capitalise on the opportunity to manage the risk associated with longevity.
“The implementation of this swap will help ScottishPower reduce the long-term volatility of their pension costs in an efficient manner – an approach that is encouraged by Ofgem, the UK energy regulator,” he said.
Trustee chairman Peter Thompson of BESTrustees said: “This is a welcome step in the management of the scheme’s liabilities which helps to improve the security of benefits for all members by reducing risk.”
Legal advice for the trustees was provided by Edinburgh-based Shepherd and Wedderburn.
Partner and head of the pensions team Andrew Holehouse said: “Longevity swaps are a relatively new innovation and have in the main tended to be the preserve of London City firms to date, therefore we are delighted to have now provided advice and a positive outcome for such a long-standing client of the firm.”
Hymans Robertson head of risk transfer solutions James Mullins, whose firm provide actuarial advice to the trustees, said the deal illustrated the value in the longevity swap market at the moment.
He said: “This is being driven by high reinsurer appetite for UK longevity risk. It’s therefore highly likely we’ll see an increasing number of schemes go down this route, taking them a step closer to securing benefits.”
Mercer partner and investment adviser to the Scottish Power scheme Steven Blackie said the options for schemes to hedge longevity risk had increased in the last 12 months.
He said: “There are now a wide variety of techniques available to access the market including intermediary approaches such as that used for the scheme; captive approaches and streamlined solutions which have opened up this market for smaller schemes.”
Last month the Merchant Navy Officers Pension Fund agreed a £1.5bn longevity swap using a streamlined process that cut out the middle man. This followed a £16bn transaction agreed by the BT scheme which set up its own insurance company to pass the risk on to the reinsurance market.
Blackie said: “Trustees should consider their own circumstances to decide which, if any, approach is right for them.”