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AstraZeneca pension fund agrees £2.5bn longevity swap deal

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British-Swedish pharmaceuticals group AstraZeneca and the trustee of its pension fund have agreed a £2.5bn (€3bn) longevity swap with Deutsche Bank to cover defined benefit liabilities.

The deal hedges against the longevity risk of around 10,000 of the scheme’s current pensioners, according to Aon Hewitt, which acted as lead adviser to the trustee in the transaction.

Matt Wilmington, partner at the consultancy, said the arrangement was robust and priced acceptably.

“It was clear during the negotiations for this transaction that the capacity and appetite of the global reinsurance market to take on pension fund longevity risk is ever increasing,” he said.

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He said the firm ran a competitive process with Deutsche Bank, which included the established reinsurers, as well as several new market entrants.

This allowed the fund to get the best available terms, he said.

Linklaters also advised the trustee of the fund on the longevity swap deal.

Consultancy Towers Watson said the AstraZeneca deal and the Carillion longevity swap deal announced last week brought the number of UK pension liabilities hedged in such deals to more than £23bn.

But the firm predicted 2014 would be a year of change for the longevity hedging market.

Sadie Hayes, senior consultant at Towers Watson, said: “Pension schemes will be increasingly willing to look at innovative approaches to access the reinsurance demand for longevity risk.”

She said reinsurers were looking beyond the UK market for longevity swap business, and deals abroad would compete for reinsurance capacity with the UK.

Although reinsurers are unable to take longevity risk directly from pension schemes, there are currently very few middlemen actively marketing longevity swaps, she said.

Because the market has become more transparent, the other parties to the longevity hedge are increasingly questioning whether it is necessary have a third party standing in the middle, Hayes said.

She said one option was for pension schemes to set up an insurance company purely as a conduit to pass the risk between them and the reinsurance market, but retaining none of the risk.

“Clearly, this type of structure will have different risks to a transaction with an established and well-capitalised provider, and will have higher governance and operational requirements,” Hayes said.

But for pension schemes ready to act as middlemen, this kind of structure could have big financial and flexibility benefits, she said.

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