The ScottishPower Pension Scheme (SPPS) has announced a £2bn (€2.7bn) longevity swap arrangement with Abbey Life Assurance, as insurance risk-reduction products continue in popularity.

UK pension funds now have a total value of longevity swaps in excess of £50bn in just over five years since the first deal in 2009.

SPPS’ longevity swap, which acts as an insurance policy against the risk of pensioners living longer than expected, will cover 9,000 pensioner members as Abbey Life, a wholly owned subsidiary of Deutche Bank, takes on the risk.

The scheme, which had £2.8bn in assets at the end of 2013, estimated the average male SPPS worker would live to be 88 years old, while female employees had an average life expectancy of 89.9 years.

Peter Thompson, chair of the trustee board, said the deal was a positive step in managing the scheme’s liabilities, and improved security of benefits for all members.

The trustee was advised on the deal by Mercer, with legal counsel provided by Scottish law-firm Shepherd and Wedderburn. Hymans Robertson acted as actuarial advisers.

Head of longevity swap consulting at Mercer, Andrew Ward, said reinsurance firms were the end destination of longevity risk with the deal showing a range of interest from the reinsurance market.

“As a result, it was ultimately possible to remove the risk at below the level of the current funding assumptions thereby achieving the holy grail of reducing both risk and deficit,” he said.

The SPPS deal kicks off 2015’s market as the last year saw a record breaking £25.4bn of longevity swap deals, led by the £16bn transfer between the BT Pension Scheme and Prudential Insurance Company of America (PICA).

Legal & General today published research demonstrating growing demand from longevity swaps and bulk annuities among the UK’s largest pension funds.

In other news, the Pension Protection Fund (PPF) has published its latest data on UK scheme deficits showing the worst funding level in history.

Deficits among the 6,057 schemes in the PPF 7800 Index, calculated on its ability to provide PPF-level benefits (s179), hit £367.5bn at the end of January.

This was a rise of £101.2bn in a single month as funding levels fell to 77.6%, a drop of 4.7 percentage points.

Over 12 months, deficit levels have risen over 600% as discount rates calculating liabilities continued to be squeezed by falling government and corporate bond yields.

Liabilities among the schemes now reached £1.6trn, rising over £144bn in January and exceeding asset returns of 3%.

The yield on 15-year Gilts fell 41 basis points over the month of January – which the PPF said act as the main driver of funding levels.

Over 2014, increased pressure on bond markets saw yields dramatically fall in the latter half, further causing pressure on the funding in UK pension funds.

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