The LV= Employee Pension Scheme has agreed a buy-in of around £800m with Phoenix Life after converting an existing longevity swap.
The initial longevity insurance agreement was entered into in 2012 with ReAssure and reinsured by SwissRe. The reinsurance agreement will now be transferred to Phoenix Life.
The conversion allowed the scheme to capture attractive pricing for the buy-in and follows a trend of schemes converting longevity swaps to bulk annuities. The Airways Pension Scheme conducted a similar deal as part of its £4.4bn buy-in with Legal & General (L&G) in September 2018, while Rolls-Royce did the same in its £4.8bn buyout with L&G.
The buy-in covers the benefits of around 4,100 pensioners and around 200 deferred members who had been covered by the longevity swap.
Lane Clark & Peacock (LCP) advised both the trustees and sponsor on the longevity swap conversion, while CMS acted as transaction legal counsel and provided specialist legal advice to the trustees. Redington provided investment advice to the scheme, while Eversheds Sutherland advised Phoenix Life.
LCP partner Myles Pink said the deal was an example of schemes that employed longevity swaps in the early 2010s having a mature and de-risked investment strategy.
"The level of funding in pension schemes has got to a point where they can afford to do buy-ins and buyouts," he said. "What that's shown is that schemes that have insured longevity risk through longevity swaps have now seen their asset strategies catch up and mature.
"What we did here with LV= was bring the two together - the maturing asset strategy with the longevity swap - and created an instrument that is a perfect match."
He said the approach of converting longevity swaps into buy-ins was particularly attractive to well-funded schemes of financial institutions. "They remove this deficit volatility. And that's what LV= figured out and why it made so much sense."
The important thing for the LV= scheme - and something that would also apply to any other scheme with a longevity swap agreed in the early 2010s - is "having your ducks lined up in a row", Pink said, noting that many of these agreements were made without a bulk annuity in mind.
"The trick in these transactions is to document a lot of the thinking around converting," he explained. "There is an inevitability that, if you've taken out a longevity swap, unless you really want to run your pension scheme forever, then you'll convert it into a buy-in and then to a buyout.
"If you're doing a longevity swap today, please make sure that your lawyers and your consultants spend lots of time helping you work out what that process is going to be."
One consideration when approaching an insurer to convert a longevity swap to a buy-in is understanding that the insurer will have to use the same reinsurer as the longevity swap, or the scheme "won't get enough competitive pressure", said Pink.
Scheme chairman and BESTrustees director Huw Evans said: "This conversion is an important step in improving the security of all scheme member benefits as it removes substantial asset and market-related risks as well as longevity and other demographic risks associated with a significant group of members."
The collaboration of advisers produced an "efficient process, attracting insurer interest in a busy market ", he added.
LV= capital and investment director Emily Penn said the deal "made a substantial contribution to the stability and quality of LV='s capital surplus and reduced overall pension scheme risk".
Phoenix Life head of bulk purchase annuities Justin Grainger added: "Throughout the process, the trustees and LV= were very clear about what they wanted to achieve. This enabled us to apply our structuring and risk management expertise to tailor a solution that best met those requirements, resulting in the efficient completion of a relatively complex transaction despite the backdrop of market disruption."
Around £8.7bn of bulk annuities have so far been announced this year, the majority (£8bn) of which confirmed as buy-ins. Another £12.6bn of longevity swaps have been concluded, alongside £12m of buyouts. Pink estimated total buy-in and buyout volumes could reach between £20bn and £25bn this year.
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