Live Long & Hedge?

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In the longevity-hedging space, 2015 is on track to match 2014 as a record year for the total volume of hedging deals, highlighting the significance of this area within the pensions space.


Following the Scottish & Newcastle deal in September 2015, the widely followed blog listed c£30bn of liabilties hedged so far in 2015 compared to £40bn in 2014 (which included the mammoth £16bn BT scheme deal).

Other significant developments in the longevity hedging in 2015 included:

  • Advisors turn providers: Towers Watson (Longevity Direct) and Mercer (with Zurich, for smaller schemes), two of the most successful deal advisors to date launched vehicles to allow schemes to access longevity hedges
  • Guernsey is the place to be: the offshore dis-intermediated structure pioneered by the BT deal in 2014 continued to be a popular approach in 2015. some of the details of this are pretty arcane but needless to say there are advantages and disadvantages to the structure some of which I mentioned here
  • Experience turns against trends: analysis by the institute of actuaries CMI, and covered in the Actuary magazine shows that mortality experience between 2010-2015 suggests a slower rate of improvement than that implied by the previous decade, opening the debate on assumptions that should be used in the future. A further piece in the actuary magazine highlighted the role that falling smoking rates could have.

In fact, research produced by the Institute of Actuaries in September 2015 stated that 2015 may well show the lowest mortality improvements in the 40 years of data used to calibrate the CMI model. Taking 2015 by itself of course could be regarded as a blip, but improvements were also low in 2012 and 2013 – bringing into focus the question of when this becomes a trend that should factor into the model.

We at Redington firmly believe that longevity risks can, and should, be considered alongside the other asset and liability investment risks within a pension scheme. We’ve developed a framework for assessing when, and how much longevity hedging makes sense for our clients, which can be simplified to a 5-point rule of thumb assessment:

  • Are interest rate risks hedged to the funding ratio?
  • Are risk seeking assets less than 25% of the portfolio?
  • Are you more than 80% funded on an economic basis?
  • Is pricing relatively attractive?
  • Do you have the time and governance bandwidth to commit to the deal process?

Meanwhile, demand for longevity hedging looks set to continue at roughly the current rate of £40bn per year, which is equivalent to 2-3% of total UK pension liabilities. The total amount hedged to date is c£100bn or 4-5% of total liabilities.

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