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UK roundup: Skanska, Zurich agree £300m longevity hedge

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Zurich Assurance has struck a longevity hedge transaction with the UK pension fund of Skanska Construction Services.

The deal – the sixth such transaction between Zurich and Skanska – covers roughly £300m (€342m) of liabilities and is a “named life” policy, covering 1,000 pensioners and their dependents.

Harvey Francis, chairman of the trustee board, said the deal had helped “improve the security of benefits for all members by removing the uncertainty of future costs to the fund arising from existing pensioners living longer than forecast”. 

Suthan Rajagopalan, head of longevity reinsurance at Mercer and lead adviser on the transaction, added: “Before these six transactions – which are approaching a total of £1.5bn – ‘named life’ longevity hedges were exclusive to only the largest schemes with over £500m of pensioner liabilities and deal sizes averaged £2bn.

“These deals pave the way to competitive longevity reinsurance pricing for small and medium-sized schemes, which are more exposed to so-called ‘concentration risk’ where there is potential for greater variability in members’ life expectancy due to diverse pension amounts.”

Spike in transfers from DB schemes

Consultant and actuarial firm Barnett Waddingham reported an 80% increase in transfers out of defined benefit (DB) schemes in the past 12 months.

The figure was based on a sample of 10 of the largest schemes in a wider survey the firm conducted looking at DB trends.

It reflects a significant increase in interest from DB scheme members in accessing the UK’s ‘pension freedoms’, which allow defined contribution scheme members more flexibility with their retirement options. DB members are permitted to transfer their guaranteed pension to a non-guaranteed DC scheme.

Andrew Vaughan, partner at Barnett Waddingham, said: “The private sector’s big schemes are the industry’s trendsetters. The activity we are seeing in liability management programmes as a result of the pension flexibility changes in 2015, as well as the evolution of liability-driven investment strategies which are now often focused on targeting a bulk annuity transaction, will inevitability work their way down to smaller schemes.”

Elsewhere in the survey, which covered UK pension funds with more than £1bn in assets, the company reported that 57% of schemes have a deficit, although this is an improvement on the 67% figure from last year.

Just 3% of UK schemes were open to new members, Barnett Waddingham said. Nearly two thirds (60%) of final salary DB schemes were closed to new members, with a further 37% closed to both new and existing members. Career-average DB schemes were more likely to accept new members, the firm said, with 29% still open.

Private sector schemes’ funding improves in June

Deficits of private sector pension funds shrunk during June despite asset values falling, according to three consultants’ estimates.

JLT Employee Benefits reported an aggregate funding shortfall of £176bn across all private sector DB schemes, with the aggregate funding level remaining steady at 90%. The deficit figure was a marginal improvement on May’s shortfall of £183bn. Aggregate assets fell by 2.6% during the month, JLT said, while liabilities fell by 2.7%.

Charles Cowling, director at JLT Employee Benefits, said: “Many pension schemes will be carrying out actuarial valuations now and beginning to agree new deficit recovery contributions. Even though deficits may have improved a little in recent months, for many pension schemes they will still be much higher than in 2014 when deficit contributions were last agreed.

“So, there may still be some very difficult discussions between companies and trustees over the coming months. But maybe the current respite delivered by buoyant markets is an opportunity for trustees and companies to explore liability settlement options for DB pension schemes, before market conditions turn and deliver another unwelcome surprise.”

Figures released this week by PricewaterhouseCoopers also reported a fall in liabilities across private sector DB funds. However, its Skyval index’s deficit figure was far higher at £460bn, and the funding position far worse, at 77%.

Meanwhile, Mercer’s monthly survey of FTSE 350 schemes showed the aggregate shortfall fell slightly to £131bn at the end of June. Mercer’s data gave an aggregate funding level of 85%.

Ali Tayyebi, senior partner at Mercer, said: “The apparent stability of the deficit hides the fact that liability values varied by nearly £30bn between their high and low values during the month. This highlights the potential for continued volatility in deficits in scenarios where assets and liabiliies do not track so closely to each other.”

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  • QN-2546

    Asset class: Real Estate Equity Fund (non listed).
    Asset region: Europe.
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