UK energy company SSE has hedged £1.2bn (€1.3bn) of longevity risk via a combination of buy-ins and longevity insurance.
The deals relate to two of the defined benefit (DB) pension schemes it sponsors. According to the company’s latest annual report, its DB schemes had £4.4bn in assets between them.
Hymans Robertson, which acted as project and lead adviser on all the transactions, said this was the first time a scheme had combined insurance buy-ins and longevity swaps.
The consultancy said: “It creates a blueprint which we expect others will follow, tailoring transactions to pension schemes’ individual circumstances.”
The two buy-ins were arranged with Pension Insurance Corporation (PIC) and totalled £350m, covering around £250m of pensioner liabilities in the Scottish Hydro-Electric Pension Scheme (SHEPS) and some £100m of liabilities in the Scotia Gas Networks Pension Scheme (SGNPS).
The longevity insurance, via Legal & General, covered a further £800m of pensioner longevity risk in the SHEPS.
The insurance deal is the first to use L&G’s UK-based “pass-through” structure to transfer longevity risk to the end reinsurer, Hymans Robertson said.
Graham Laughland, chair of trustees for the SHEPS, said the scheme had been able to save money at each stage of the process through Hymans Robertson’s and legal adviser CMS’ efficiency and tailored approach.
“Club Vita’s market leading longevity analytics gave the trustees great confidence in assessing both the value of the transactions and the amount of longevity risk that has been successfully removed from the scheme,” he said.
Meanwhile, Tony Fettiplace, chair of trustees for the SGNPS, said PIC had been “flexible and innovative” in helping the scheme follow the collaborative approach and achieve its aims.
In a report published yesterday, Hymans Robertson claimed demand for buy-in transactions – in which part of a scheme’s liabilities are transferred to an insurer – was set to quadruple in the next 15 years.
The consultancy estimated that as much as £700bn of liabilities and assets could be offloaded by UK pension schemes by 2032, equivalent to £50bn a year. The figure was based on a growing demand from schemes, with a significant proportion reaching self-sufficiency in the next 15 years.
James Mullins, head of risk transfer buyout solutions at Hymans Robertson, said: “Pension schemes should be proactive and gradually chip away at the problem through a series of well-timed buy-ins, to take advantage of the high insurer appetite and optimal pricing we’re seeing in the market today.”
He added that insurer appetite to take on DB pension risks would likely increase this year as they sought to meet their targets. However, he warned this would not necessarily last.
“As more and more schemes consider insuring their risk, insurers will be increasingly less able to keep up with demand,” Mullins said. “When this happens they will be more likely to give priority for their best pricing to pension schemes that have already completed a buy-in. This is because those pension schemes have demonstrated they have the knowledge, experience, governance and general readiness to carry out these transactions. So pension schemes who take proactive steps to chip away at the problem by capturing opportunities to complete a series of buy-ins will be in a strong position in years to come.”