A market growing in confidence: Swiss Re's longevity funding innovation

Pension funds and insurers are becoming more confident about the solutions available to manage longevity risk. This is illustrated by the fact that a large UK pension fund is now no longer financially exposed to 17,000 of its pensioners living longer than expected thanks to Swiss Re’s agreement with global paint specialist, Akzo Nobel.

Employer defined benefit pension plans promise to pay an agreed income to their members for the rest of their lives. But the good news that people are living longer puts an immense strain on the pension scheme. If people live much longer than expected, additional funding will need to be sought from the corporate sponsor.

Akzo Nobel, the world’s largest global paint, coatings and speciality chemicals company, decided to insure its pension fund against future unexpected rises in life expectancy. They reached an agreement to cover GBP 1.4 billion (USD 2.2 billion) of liabilities in respect of 17,000 members through Swiss Re longevity insurance – sometimes referred to as an “indemnity longevity swap”.

A direct solution

Swiss Re has a history of innovation in the quickly-expanding longevity market. In 2007, the company carried out its benchmark transaction with Friends Provident. In 2010, the company issued USD 50 million of longevity trend risk bonds to the capital markets through the Kortis Capital Ltd ("Kortis") securitisation programme.

The 2009 GBP 1.0 billion contract with the Royal County of Berkshire Pension Fund was groundbreaking for two reasons: it was the first longevity agreement with a public sector fund and the first to involve a re/insurance group directly insuring a pension plan’s longevity. The Akzo Nobel transaction continues with Swiss Re’s approach of being open to dealing directly with pension funds for longevity insurance.

Whereas many similar transactions have involved a third party taking the risk and then selling it on, Swiss Re writes the risk directly to its balance sheet. This means that the pension plan will know long into the future that its longevity related liabilities are underwritten by a reinsurer with substantial financial strength.

Maintaining the confidence boost

Costas Yiasoumi, Head of Longevity Solutions, Swiss Re Corporate Solutions, comments: "Longevity contracts are very long-dated and pension fund trustees need counterparties that are in this market for the long haul. As a well-diversified re/insurer with a 150-year track record, we were able to give Akzo Nobel, the pension plan trustees and its advisors the necessary confidence for the long-term."

And with such increased confidence, the longevity market is expected to grow in the UK and beyond over the forthcoming years.

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