The Marsh & McLennan Companies (MMC) UK Pension Fund has entered into a £3.4 billion ($4.5bn) longevity reinsurance agreement with Canada Life Reinsurance and The Prudential Insurance Company of America (PICA), which covers the liabilities of around 7,500 pensioner members.
The transaction is the first longevity risk transfer to be completed through the ‘Mercer Marsh’ longevity captive solution, which includes no up front premiums, according to a statement from Mercer, which acts as the advisor to the MMC UK Pension Fund.
Mercer explains that the longevity risk of around 7,500 pensioner members was transferred via a captive approach to the reinsurance sector, through incorporated cells in Guernsey, with Canada Life Reinsurance and the PICA assuming an equal share of the exposure.
Commenting on the transaction, Suthan Rajagopalan, lead transaction advisor for the Trustee and Head of Longevity Reinsurance at Mercer, said; “Mercer is delighted to have helped the Fund manage its longevity risk in this way. We worked closely with the Trustee to achieve a successful outcome for all parties and further help the Fund to continue its de-risking journey.
“Longevity risk is a key risk for defined benefit schemes and is more significant than ever in the historically low-yield environment. As part of this transaction, we have advised on and managed a broad and highly competitive process to remove this long-term risk and have been able to facilitate the transfer of risk to the reinsurance market cost-effectively through the ‘Mercer Marsh’ longevity captive solution.”
The availability of efficient and competitive reinsurance capacity enabled the structuring of a “cost-effective transfer,” said Mercer.
Canada Life Reinsurance assumed £1.7 billion ($2.25bn) of the longevity exposure, with Global Head, Jeff Poulin, commenting; “This transaction highlights our expertise in underwriting large, complex and innovative risk transfer initiatives together with the value of our financial strength.”
General Manager of the Barbados Branch of Canada Life, which wrote the transaction, Tom O’Sullivan, added; “I am pleased to announce this major reinsurance agreement, which reflects our ability to collaborate effectively with the MMC U.K. Pension Fund to create a solution to efficiently hedge their longevity risk.”
Trustee Chairman, Bruce Rigby, said; “Rising life expectancy has led to significant increases in UK pension scheme liabilities over the past couple of decades. The Trustee commissioned a full market review of all longevity risk transfer structuring approaches and corresponding providers. Based on a combination of factors such as cost, efficiency, future flexibility and security the Trustee selected the ‘Mercer Marsh’ longevity captive solution. By implementing this longevity hedge in partnership with MMC and its advisers, the Fund has taken a major step in removing this risk.”
While Stephen Hawkes, Head of Office at Marsh Captive Solutions in Guernsey, added; “Marsh was pleased to help establish an efficient mechanism to transfer longevity risks to the reinsurance market, working together with Mercer on this transaction to achieve a positive de-risking outcome for the Fund.”