UK - Babcock International, the engineering firm, has in principle secured a deal to hedge some of its pensions longevity risk through the market's first longevity swap, though consultants say the arena could quickly grow to be cover a potential £15bn (€17bn) in pension assets this year.

IPE understands Credit Suisse is the counterparty, once the Babcock deal is completed, to deliver a longevity swap on two of the firm's defined benefit pension schemes, following advice from Watson Wyatt.

The full details of the deal are not being disclosed at this stage as final terms have to be signed. But Babcock yesterday announced in its unaudited preliminary results for the year ending 31 March 2009 that its trustees have entered into "contracts with an agreed counterparty to cap their exposure to increasing life expectancy", to apply longevity swaps to existing pensions in payment.

The schemes will receive fixed payments in exchange for the actual value of pensions due to members, and irrespective of how long members and their dependents actually live. This means should the members live longer than expected Credit Suisse will be required to continue paying the benefits, and the pension scheme therefore sees the advantage, but Credit Suisse will reap the benefits should the members die earlier than assumed.

A separate deal is likely to be done in the future, according to the firm, to tackle its remaining £250m in pensions in payment liabilities not covered under this plan, while further swap deals are being investigated to hedge the pension schemes' interest rate and inflation risk.

The current longevity swap deal requires Babcock to pay an extra sum above the current funding assumptions set by trustees for a 20-year period, though the knock-on effect for Babcock is there will be no material impact on the group's P&L as a result of the deal.

Babcock said its DB liabilities total £1.7bn (€1.88bn) at the end of March while the schemes themselves had a pensions surplus of £50m, although the results showed there was also an actual loss on plan assets for 2008 was £115m.

While is the first such deal to hit the market, consulting firm Hewitt Associates said there are companies lining up to follow a similar route and predicts the longevity swap market could grow to cover £5bn in pensions assets within the next year.

"We expect to see a surge of interest in completing longevity swap deals now that the "first mover" barrier has been taken down," said Martin Bird, longevity solutions lead at Hewitt.

"I would expect a minimum of six deals over the next year, initially focusing on the larger end of the market. Current pricing levels are very aggressive as providers line up to provide capacity to write deals. We are currently working on a number of cases where pricing is at a similar level to the life expectancy assumptions already used for scheme specific funding purposes. That means it's currently possible to purchase longevity protection without any immediate impact on cash contributions to the pension scheme," he added.

At the same time, John Ball, head of defined benefit consulting at Watson Wyatt, said his company is working with 10 large clients who collectively have pension fund assets of £10bn.

"Particularly while this market is new and we work out what the structure is, it is the bigger schemes that are interested and have the resources to throw at this. With time, [the deals] will be more standardised but we are working with 10 clients who have total liabilities of £10bn," said Ball.

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