Mitigating the Methuselah effect

Swiss Re helps UK public pension fund address the challenge of retirees’ rising life expectancy

Swiss Re has conducted its first longevity transaction with a pension fund. The deal gives the UK’s Royal County of Berkshire Pension Fund (RBPF) protection against the uncertainty associated with retirees’ rising life expectancy. The longevity risk involved amounts to CHF 1.7 billion of pensioner liabilities.

The longevity contract transfers the longevity risk for RBPF’s existing pensioners through a straightforward insurance policy. It covers 11,000 pensions of the fund that were in payment on 31 July 2009.

In a nutshell, longevity risk is that faced by organisations who have obligations to pay pension benefits – chiefly corporations, public sector bodies and insurers. The risk arises when individuals live longer than expected. In recent decades, pension plan managers have become increasingly aware of the risk of cash shortfalls resulting from increased life expectancy. Because people are living longer, risk holders are keen to find solutions to the challenge.

Says Swiss Re’s Head of Pension Solutions Costas Yiasoumi, who led the transaction: “We have done longevity transactions in the past, most recently in Australia. However, this is the first with a pension fund. An innovative feature of the deal is that the premium and the claims are index-linked to take account of inflation.”

Given the demographic trend, the potential market for such transactions is significant and acquiring business in this area would be in line with the company’s strategic goals. Swiss Re would like to grow its longevity book in a steady manner, seizing  the most appropriate opportunities as they emerge.