Analysis: Getting a grip on longevity risk

Jack Jones examines how the longevity swap market could develop over the coming year.

After a record breaking year for longevity swaps, which saw a spate of huge deals being completed, there are signs that their appeal could be broadening as the market matures.

The Pilkington transaction announced last month took the volume of longevity risk passed on in 2011 to around the £7bn mark (PP Online, 11 January) but like all bar one of the other ten deals that have been completed so far (PP Online, 28 November, 2011) it involved an extremely hefty chunk of liabilities – £1bn worth in this case.

Both providers and consultants are now claiming that, two and a half years after the first transaction was completed, the market is seeing enough standardisation for these swaps to become part of the de-risking toolkit for much smaller schemes.

After concluding the Pilkington swap, Legal & General announced it would be targeting deals involving liabilities of between £50m and £250m (PP Online, 10 January), which could bring around 1,000 schemes into the market.

Head of business development Tom Ground says these schemes could benefit more than the larger ones from controlling longevity risk.

“Smaller pension schemes are generally exposed to greater mortality risk than larger schemes as the impact of any random fluctuations in longevity are felt more keenly in a smaller population,” he explains.

And Hymans Roberston senior liability management specialist James Mullins says there are several other providers now willing to quote on deals of this size.

“The deals are still complex, but the more that have gone through, the more standardised the contracts and the approach to collateral have become, so the time and cost of getting to the transaction stage are both reduced,” he says.

But Rothesay Life co-head of business development Guy Freeman believes the lack of experience data for schemes with less than £250m in liabilities means they are better suited to buy-ins than longevity swaps.

“Smaller longevity swaps would be hard to value and therefore hard to collateralise. So the smaller market is likely to continue to focus on annuities where the longevity risk is bundled together with other risks.”

L&G’s proposition is not collateralised, however, and Ground believes this – together with the group’s ability to price and monitor the risk without passing it on to a re-insurer – has made the process easier and quicker for smaller schemes.