The main UK defined benefit (DB) pension schemes of the Italian tyre company Pirelli Group have completed longevity swaps worth £600m (€707m), insuring the risk with Zurich Assurance Limited.
The transactions are seen as a sign that the longevity swap market for smaller UK pension schemes is opening up, having previously been the preserve of bigger schemes.
The transactions are understood to have been finalised in early August.
Cardano and Mercer were investment and transaction advisors to the trustees of the pension schemes, respectively.
The hedges, one for each of the two schemes*, were structured as “whole of life” insurance policies and are “named life”, which means that they cover named pensioners and contingent dependants. This is in contrast to index-based swaps that track a general UK population.
The deals agreed with Zurich cover £600m of pensioner liabilities.
Zurich retained 25% of the longevity risk, with the remainder reinsured with Pacific Life Re.
A spokesperson for Zurich told IPE that the deals with Pirelli are the first time that Zurich has retained part of the longevity risk. “In the first transaction we completed in December, we passed on all the longevity risk to Pacific Life Re,” he said.
According to those involved in the transactions, the transactions are noteworthy because they show that managing longevity risk via longevity swaps is also an option for smaller and medium-sized pension schemes.
Andy Stewart, head of client solutions at Cardano and adviser to the Pirelli schemes, said: “Historically, named-life longevity swaps were only available to very large pension schemes but recent product development by providers such as Zurich means that small to medium sized schemes can now also access these solutions.”
In 2015, Zurich and Mercer developed a pre-negotiated standard longevity contract, with a panel of reinsurers providing pricing. Those involved in the transaction said this “streamlines” the de-risking process for smaller and medium-sized UK DB pension schemes.
Simon Foster, global head of Zurich International Corporate Solutions, said: “This transaction shows how two pension schemes can be grouped together to provide scale and therefore obtain more attractive pricing terms.”
Tony Goddard, pensions manager at Pirelli, said that the longevity swaps add to steps the schemes have been taking to manage other risks within the pension funds.
“We are pleased to continue this process with these transactions and to seize the early opportunity to hedge longevity risk,” he said.
“The streamlined features of this longevity swap make this a cost-effective solution for the funds, with features such as no collateral requirements and transparent insurer and reinsurer pricing being particularly attractive,” he added.
The Pirelli swaps are the second and third named-life longevity hedges to have been completed for smaller UK DB schemes using the approach developed by Mercer and Zurich.
As at 30 June 2016 the present value of Pirelli’s funded UK pension liabilties were €1.26bn, according to Pirelli’s half-year report.
In December 2015, Zurich carried out a £90m streamlined longevity swap with an undisclosed UK pension plan.
The Electricity Supply Pension Scheme (EPSP), a £32bn industry-wide pension scheme, recently reported having hedged part of its longevity risk, with one of its sponsors agreeing a £1bn deal with Abbey Life.
*Pirelli General Pension and Life Assurance Fund, and Pirelli Tyres Limited 1988 Pension and Life Assurance Fund