UK - The largest longevity insurance deal seen yet by a pension fund has been completed by BMW's UK pension fund with Abbey Life and Paternoster.

Just a week after Hymans Robertson estimated the longevity swap market could reach £10bn (€11.3bn) in 2010, BMW confirmed it has agreed a bespoke longevity swap that will provide the BMW (UK) Operations Pension Scheme with a hedge for life expectancy risks. The sum protects nearly £3bn (€3.4bn) of pension scheme liabilities related to approximately 60,000 pensioners and contingent benefits such as spouse's pensions. (See earlier IPE article: Longevity swap market to hit £10bn in 2010)

Abbey Life, an insurance company wholly-owned by Deutsche Bank, will insure the longevity risk of the scheme for the whole of life - until the last pensioner or their spouse dies - but has already reinsured part of the risk with a consortium of reinsurers including Hannover Re, Pacific Life Re and Partner Re. Abbey Life has also used the structuring expertise and longevity modelling techniques of Paternoster, which is also partly-owned by Deutsche Bank.

BMW was revealed to be considering its options for a longevity deal earlier this month, as part of a risk reduction strategy. Latest figures from the 2007 actuarial valuation of the scheme showed the pension fund at that time had a deficit of £584m and a funding ratio of 87%. (See earlier IPE article: Longevity hedge could drive pension risk for BMW UK)

In a statement BMW said: "The trustees of the BMW (UK) Operations Pension Scheme have entered into a longevity hedge with Abbey Life. There will be no direct impact on members of the scheme who will continue to receive their pensions directly from the scheme in the normal way. The longevity hedge simply makes it easier to budget for future pension payments and makes scheme funding more secure overall which benefits everyone in the scheme."

Martin Bird, principal and head of longevity & risk solutions at Hewitt Associates, the consultancy which advised scheme trustees on the transaction, said: "Entering into a bespoke longevity hedge to mitigate against continued improvements in member life expectancy is a natural extension to the scheme's current liability-matching investment strategy and is designed to enhance further the security of members' benefits."

The policy is a named life policy, which means rather than being referenced against an index, the transaction actually covers the longevity exposure of the members in the BMW scheme, so it is bespoke and customised in a manner similar to the Babcock longevity deals. The transaction is also fully collaterised, despite being written as an insurance-regulated policy.

Bird said the hedge has also been constructed to provide flexibility, which "has not been done before", so the hedge can be realigned over time to adjust the specific benefit structure and better match the longevity risk of the scheme.

Nardeep Sangha, CEO of Abbey Life said: "In bringing this leading solution to BMW and its UK pension scheme, we have demonstrated our ability to combine our balance sheet strength and internal expertise with the specialist pensions and longevity know-how at Paternoster to bring about a landmark transaction. As this market develops, we are committed to providing innovative solutions to UK pension schemes. "

Elsewhere, data from Mercer's new Pension Buyout index suggests it would cost a company with a mature pension scheme holding liabilities and assets of £100m an additional £44m to complete a buyout with an insurer.

The Pension Buyout index is based on pricing data from Aviva, Legal & General and Pensions Insurance Corporation to provide employers with a monthly snapshot of the affordability of a buyout or buy-in.

A graph tracking the affordability of bulk annuities since September 2009 showed that the cost has remained above 140% of the accounting reserve, aside from a slight dip in October and November.The cost is currently at its highest level of around 144%, or an extra £44m for a £100m scheme, according to Mercer. This cost reflects the difference in valuation methods between corporate accounting standards and insurance company requirements.

David Ellis, head of longevity risk management at Mercer, said a bulk annuity is a "significant transaction, and knowing when to trade can be difficult as most existing reviews of the UK bulk annuity market are either not available frequently enough or are based on the bulk annuity prices offered by only one insurer.:

He claimed Mercer's buyout index would gives sponsors more clarity when considering this tactic.

"The relative pricing between buyout and accounting costs may seem high but this is the price of the 'trade off' to remove the pension risks and is increasingly seen as an acceptable cost to eliminate pensions risks," said Ellis.
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