French insurance group AXA has insured the longevity risk on approximately half its UK defined benefit (DB) pension fund’s liabilities in a swap deal with a US reinsurer.

The Reinsurance Group of America (RGA) will now take on £2.8bn (£3.9bn) worth of longevity in a swap deal arranged via the scheme’s sponsoring insurer employer.

Reinsurance companies only deal with banks and insurance firms, with the pension scheme able to leverage against its sponsor’s place in the market.

The longevity swap will now form part of the £3.6bn scheme’s asset portfolio, with RGA providing income to the scheme to hedge it from increases in longevity among its 11,000 pensioner members.

AXA becomes the fifth UK insurer to arrange longevity swaps for their own DB schemes, as the UK market as a whole has £53.4bn worth of liabilities hedged.

Stephen Yandle, chairman of the scheme, said: “[We have] taken an important step to ensure our DB scheme members’ benefits are strongly secured against continuous improvements in life expectancy.”

James Mullins, head of buyout solutions at Hymans Robertson, said it was telling that insurance companies were continuing to transfer their pension schemes’ longevity risk to third parties.

Insurers will be subject to additional capital requirements when Solvency II kicks in later this year, requiring companies to shore up longevity within their books and their own pension schemes.

Mullins said this could be a factor in the surge of insurers de-risking.

“The market for longevity swaps represents excellent value at the moment, being driven by high reinsurer appetite for UK longevity risk,” he said.

“We are likely to see an increasing number of schemes going down this route.”

The AXA longevity swap is the first of 2015 after the £25.4bn record level of swaps seen in 2014.

Last year also saw the first scheme access the reinsurance market without an intermediary firm – with Aviva aiding its scheme to access the market directly.

This allows pension funds to save on costs and benefit from better pricing by avoiding price averaging, which occurs when intermediary insurers or banks engage with several reinsurers to spread credit and counterparty risks, as well as exposure limits.

Four of the five deals in 2014 used this process.

Last July, the BT Pension Scheme dealt directly with the Prudential Insurance Company of America by setting up its own insurance company in a £16bn longevity swap.

Towers Watson, which advised the BT scheme and went on to create an insurance cell for smaller pensions schemes to access the market, also advised the AXA scheme.

Shelly Beard, senior consultant at the firm, said progress on de-risking investments meant longevity was becoming a more prominent un-hedged risk – leading to growing demand.

Topics