The number of U.K. company pension schemes entering into longevity swaps and bulk-annuity deals in 2016 is expected to increase due to schemes recognizing the importance of managing the longevity risk in their portfolio, according to a new report.
Willis Towers Watson’s 2016 De-risking Report found that 2015 saw in excess of £10 billion of liabilities transferred to the insurance market through either buy-ins or buy-outs. Much of this came from pension schemes that had transacted in this market previously, according to Willis Towers Watson.
The company’s report says that ‘top slicing’ – where pension schemes separately package up small groups of individuals with high liabilities in order to remove concentrated longevity risk – will increase as schemes improve their understanding of the areas where they have the highest concentration of risk.
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“There are £2 trillion of U.K. defined benefit liabilities and to date only £150 billion of these have hedged longevity risk,” said Shelly Beard, senior de-risking consultant at Willis Towers Watson.
“This is an area that continues to grow rapidly both in terms of the size and volume of annuity transactions and longevity swaps, with more innovative ways to access this market being developed. With more and more pension schemes starting to think about a de-risking journey and how to manage their risks, the activity in this market is only expected to increase as longevity risk moves higher up the agenda for pension schemes.
“Our current expectations for 2016, allowing for the bedding in of Solvency II, is that there will be continued growth with around £12 billion of liabilities being transferred to insurers. This is supported by the significant number of schemes we are currently helping to secure and implement transactions.”
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The report predicts that overall deal values for longevity hedging could hit £20 billion in 2016, which would be the second largest year on record.
“The prominence of longevity risk on schemes’ agendas means that we are expecting to see continuing growth in longevity swap markets,” said Beard. “2014 saw deals covering £25 billion of liabilities, including the record-breaking £16 billion hedge for the BT Pension Scheme. This flow of deals continued in 2015 with AXA, Heineken and a further deal for Aviva – some £6 billion of liabilities.
“Based on the conversations we are having with our clients, it is likely that 2016 could see longevity-hedging deals covering over £20 billion of liabilities. The range of structures available for accessing the demand for longevity risk in the reinsurance market means that longevity hedging is more affordable and flexible than ever.”