UK – Defence and aerospace giant BAE Systems has completed one of the UK's largest longevity risk deals, passing £2.7bn (€3.1bn) of liabilities onto Legal & General (L&G) and Germany's Hannover Re.
The agreement, announced as the company published its year-end results, will cover the liabilities of the BAE Systems 2000 Pension Plan, a fund launched in the wake of British Aerospace merging with Marconi Electronic Systems in 1999.
Nigel Tinsley, group pensions director at BAE Systems, said he was pleased to have worked with L&G, law firm Allen & Overy and consultancy Aon Hewitt, which advised on the transaction, to develop the "innovative" risk management deal that would cover 31,000 of the scheme's existing pensioners.
"This arrangement offers us a flexible approach to managing the key risk of longevity in the plan," he said.
"We are particularly pleased we were able to complete the process in a structured and straightforward fashion within six months."
Tom Ground, head of L&G's insurance de-risking solutions, noted that, as the risk was passed on only to Hannover Re, it allowed BAE to achieve best value on a swiftly executed transaction.
Martin Bird, Aon Hewitt's head of risk settlement, added: "The insurance arrangement is fully collateralised and tailored to reflect the plan's unique profile, bringing together structuring capability and market capacity to enhance members' security and reducing the funding volatility in the plan."
Hannover Re noted that the £2.7bn in liabilities from the transaction, based on end-of-year data, had since risen to £3.2bn when discounted against 15 February's LIBOR rate.
The re-insurer's chief executive Ulrich Wallin said longevity was an interesting risk for it to take onto its books due to its negative correlation with the mortality risks associated with large parts of its portfolio.
Hannover Re added that it stood to gain total premium income of £2.2bn and gross premium of £100m during the current financial year – a figure that would indicate around 30% of the longevity risk would remain with L&G.
A spokesman at L&G said the company would not seek to pass its exposure onto any other re-insurer.
The longevity deal is not the first de-risking transaction to take place this year but is by far the largest longevity insurance to have taken place so far in the UK.
Last May, Dutch chemicals company AkzoNobel insured £1.4bn of longevity risk directly with Swiss Re, and L&G itself joined the longevity insurance market in late December 2011 when it insured £1bn of risk from the Pilkington Superannuation Scheme, the fund for the UK glass manufacturer.
Shortly after the Pilkington deal was made public, L&G's Ground said the longevity swap market was nowhere near capacity, despite large swaps being agreed with Rolls Royce and UK broadcaster ITV in the months prior.
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