The Marsh & McLennan Companies (MMC) UK Pension Fund has finalised a £3.4bn longevity risk transfer to the global reinsurance market through a captive solution.
The deal, which completed in July, covers liabilities for all 7,500 pensioner members, and used a "captive approach" to structure a contract with Guernsey-based insurer cells managed by Marsh Capital Solutions Guernsey.
This approach allowed risk to be efficiently transferred to the reinsurance market through two cells, Fission Alpha IC and Fission Beta IC, the scheme said.
Canada Life Reinsurance and Prudential Insurance Company of America (PICA) reinsured an equal share of the risk as part of the deal, which is believed to be the largest longevity risk transfer for a UK pension fund since 2014, and the third largest ever recorded.
The trustees were advised by Mercer, a subsidiary of MMC, Linklaters, and Appleby, while MMC was advised by Mercer, Freshfields Bruckhaus Deringer, and Carey Olsen. Herbert Smith Freehills, and Mount Ozannes advised Canada Life Re, while PICA received advice from Willkie Farr & Gallagher.
According to MCM's 2016 accounts, the scheme had a surplus of $347m (£263m) on 31 December 2016, with assets and liabilities totalling $10bn (£7.6bn) and $9.7bn (£7.3bn) respectively.
Trustee chairman Bruce Rigby said a number of factors made this deal the most attractive to the fund.
"Rising life expectancy has led to significant increases in UK pension scheme liabilities over the past couple of decades," he said. "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."
Mercer head of longevity reinsurance, and lead transaction adviser to the trustees, Suthan Rajagopalan added the process was competitive.
He said: "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."
Marsh Captive Solutions head of office Stephen Hawkes said: "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."
Prudential head of international longevity transactions William McCloskey added: "We are proud the MMC UK Pension Fund and its captive insurer have entrusted their longevity risk transfer to us. This significant transaction highlights the importance of the captive solution in longevity risk transfer and proves the captive remains an important option for trustees to efficiently and cost effectively transfer longevity risk in the manner that works the best for them."
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