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IPE special report May 2018

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Carillion hedges £1bn in DB liabilities in longevity swap deal

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UK facilities management company Carillion has agreed a longevity swap deal to hedge around £1bn (€1.2bn) of its defined benefit (DB) pension scheme liabilities with Deutsche Bank.

The swap has been agreed between the German bank and five DB schemes sponsored by Carillion.

It covers around 9,000 pensioners with a liability of around £1bn, Carillion said, adding that the deal has no immediate cash impact on the company.

Robin Ellison, chairman at Carillion (DB) Pension Trustees, said: “Pension scheme liabilities have risen significantly in recent years due to increasing life expectancy.”

Richard Adam, Carillion Group finance director, said the deal had removed a significant amount of risk at an attractive price.

“The longevity swap reflects Carillion’s commitment to ensuring the security of the benefits of all our pension scheme members and reducing pensions risk,” he said.

The company said the swap was one of several exercises it had undertaken as part of its long-term strategy to reduce pension risk, improve the security of members’ benefits and increase certainty about future costs.

Andrew Ward, senior consultant at Mercer, who led the advice for the trustee, said both trustee and sponsor of the Carillion scheme saw the opportunity for removing the longevity risk at a price that seemed attractive.

He said around a dozen such longevity swap transactions had been done in the UK DB pensions sector to date.

“We’re anticipating that this recent transaction will kick-start the market,” he said.

The current year was set to prove the busiest year in terms of longevity swap and pensions buyout activity, Ward said, and he predicted 2014 would probably be even busier.

However, prices for the deals could rise in the future, he said.

“The long-term pent-up demand is probably bigger than the supply, so you could see price rises in the future from reinsurers,” he said.

 

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