EUROPE - The European Investment Bank is to issue a 25-year 540 million-pound (775 million-euro) bond as part of a product designed by BNP Paribas aimed at protecting UK pension schemes against longevity risk.
"We welcome this opportunity to further enhance EIB's appeal among pension funds, through a contribution that can add a new instrument to their risk management mechanisms," said EIB vice president Peter Sedgwick.
"This transaction reaffirms EIB's well-established leadership position in the Sterling market and strong track record in responding to investor needs for innovative long-dated products."
The EIB is cooperating as issuer in the Longevity Bond, with BNP Paribas as structurer/manager and reinsurance group PartnerRe providing risk-taking capacity for the longevity risk.
The French bank said the bond would combine "longevity protection and an issuer with a credit platform of the highest standing".
The move fits in with the objective stated in the EIB's operational plan for 2004-2006 to not only pioneer longer maturities but also "introduce new structured products in response to local institutional demand".
"Against the backdrop of the pensions crisis, this innovative structure is designed to help UK pension funds hedge their annuity liabilities and enable them to meet their pension promises," the French bank said in a release.
The bond's cash flows will be based on the actual longevity experience of the English and Welsh male population aged 65 years old, as published annually by the Office for National Statistics.
The future cash flows of the bond will be equal to the amount of a fixed annuity multiplied by the percentage of the reference population still alive at each anniversary. The cash flows, therefore, decline over time.
BNP Paribas added: "Whilst the Longevity Bond does not refer to the population of a particular pension plan, we believe that the hedging of longevity risk based on a segment of the overall English and Welsh population is a very effective hedge for a large number of pension funds.
"We believe that the Longevity Bond is a landmark product in the risk management of pension funds, by offering a hedge against the unexpected changes in longevity," said Jacques d'Estais, head of BNP Paribas' fixed income business.
The news came as Aon Consulting said pension scheme liabilities have risen more than assets in the last three months - largely due to a 0.16% fall in long-dated index linked gilt yields. It said the three percent rise in equity markets in the three months to the end of September has been offset by a 4.5% increase in liabilities.