German reinsurer Munich Re has completed a longevity swap deal with the Trustee of Lafarge UK Pension Plan, the UK pension scheme of French industrial company Lafarge.
The arrangement is intended to reduce the Plan’s exposure to longevity risk, which arises when pensioners live longer than expected and thus claim more money on their retirement plans.
Lafarge identified longevity risk as the largest individual risk in its plan due to its focus on defined benefit (DB) schemes, which pay a pension based on a member’s final salary.
Transferring this risk to reinsurers via a longevity swap has been a popular option among UK pension schemes recently, as it allows them to hedge the risk of pensioners living longer lives.
Although details of the swap were not disclosed, Munich Re will have received a premium for taking on the exposure, and will make payments to offset the increase in liabilities of the plan if longevity turns out to be higher than assumed.
Roger Mountford, Chairman of Lafarge UK Pension Plan, said the swap represented an “important step” for the scheme that would work in conjunction with a renewed focus on the investment strategy of its DB sections to reduce volatility.
“Gains in life expectancy are good news but do increase the cost of providing pensions,” the Plan stated in its monthly newsletter, concluding that a longevity swap was its best option to mitigate risk.
Munich Re did not comment on the announcement, but states on its website: “We have demonstrated our ability to execute longevity related transactions on a number of occasions, and we believe we bring substantial capacity; strong counterparty/credit risk; and a pragmatic approach to each opportunity.”
Other recent longevity reinsurance deals of note include a £1.2 billion transaction between SCOR and Pension Insurance Corporation (PIC) and an arrangement between RGA and Manulife that relates to 45,000 annuitants.
A record £10 billion in longevity swap deals were completed in 2018, with analysts at Willis Towers Watson predicting that the overall bulk annuity market will grow to around £30 billion in 2019.
