UK - The Royal Borough of Windsor and Maidenhead (RBWM) has completed the first longevity hedging deal for a local government pension scheme (LGPS).
The council confirmed it has entered into a longevity hedging insurance contract with Swiss Re following a 12-month negotiation process. Under the terms of the arrangement, the longevity risk of 11,000 pensioners - as of 31 July 2009 - of the Royal County of Berkshire Pension Fund will now be borne by the insurer until the last individual dies.
Councillor John Lenton, chairman of the Berkshire Pension Fund Panel and Berkshire Pension Fund Advisory Panel, said average life expectancy increases by at least one year every five years and the panels had "become increasingly concerned at the consequent cost to the pension fund." (See earlier IPE article: Berkshire plans to hedge longevity)
He added the fund had been "seeking a means of meeting this growing cost" for more than a year, and the preferred solution was found in the life insurance industry. As a result, both pension fund panels approved the insurance contract on 11 November 2009.
Lenton explained: "The contractual arrangements are that the pension fund makes approximately the same payments as if there was no change from longevity assumptions used in the 2007 triennial valuation." The actuarial valuation of the pensioner liabilities covered by the contract was £750m (€837m) in 2007, equivalent to around 43% of the fund's total liabilities.
In return, he confirmed, Swiss Re would bear any future positive or negative change caused by longevity, which means the scheme is "effectively outsourcing to Swiss Re the financial risk of pensioners living longer than anticipated."
That said, the pension fund retains legal ownership of its assets and complete control over the investment strategy.
Nick Greenwood, pension fund manager at RBWM, confirmed the council had looked at other options, such as swaps, to deal with the longevity issue but said it had "rejected them on the grounds of complexity, issues over collateral and counterparty risk".
Longevity hedging for pension funds is a relatively new market, and only Babcock and Royal & Sun Alliance have previously completed deals for their defined benefit (DB) schemes, although RBWM admitted other local authorities may follow it down this route.
The council declined to comment on whether any other insurers were considered in the process but added that "analysis of the terms and the impact on technical provisions" meant it was satisfied it achieved a good deal on the price. (See earlier IPE articles: Babcock edges closer to completing longevity deals; Unusual market conditions sparked RSA longevity deal and Babcock confirms longevity deal with Credit Suisse)
Greenwood noted the contract is in place until the last pensioner or dependent dies, excluding children, but confirmed it will not cover new tranches of pensioners. However, he admitted "in time we might consider insuring them if the price was right".
In the meantime, officials will consider the possible options available for tackling the longevity risk associated with deferred and active members "next year", to see whether the pension fund can achieve similar deals on "acceptable terms", when assessing the expected benefit against the possible cost.
Christian Mumenthaler, head of life and health at Swiss Re, said: "We are very proud to announce this innovative transaction, because it is not only Swiss re's first longevity protection written for a pension fund, but the first pure longevity risk transfer written for any governmental body worldwide."
The council received legal advice on the deal from Osborne Clarke and actuarial advice from Barnett Waddingham.
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