A defined benefit scheme sponsored by FTSE 100 company Scottish & Southern Energy has converted a two-year old pensioner longevity swap into a £750m (€861m) buy-in with Pension Insurance Corporation (PIC).

Scottish Hydro Electric Pension Scheme (SHEPS) struck the longevity swap, a £800m deal, with Legal & General in 2017, and has moved to convert it into a buy-in on the back of improvements in its funding position.

The deal with PIC means SHEPS has covered all the risks associated with the vast majority of its pensioner liabilities, with the scheme having struck a £250m buy-in with PIC in late 2016 before adding the longevity insurance with L&G.

Graham Laughland, chairman of the SHEPS trustees, said: “I am delighted that the trustees have been able to take another step in reducing risk and improving the security of members’ benefits.

“This buy-in extends the insurance we have in place and provides the scheme with an income stream that matches in all material respects the pensions currently being paid. A very smooth process from my perspective.”

According to Hymans Robertson, which advised the SHEPS trustees, out of 40 longevity swaps that have been put in place by pension schemes, only five, including SHEPS’, have been converted into a buy-in.

Richard Wellard, partner at the consultancy, said: “The process of converting a longevity swap to a buy-in is more complex than implementing a buy-in from scratch, but we expect more schemes to follow this path as they become better funded and look to lock down risk.”

‘Open market’ 

Tristan Walker-Buckton, head of pricing at PIC, told IPE the fresh transaction with SHEPS was the first time a scheme had converted a longevity swap to a buy-in with a counterparty different to the one behind the longevity swap, where the latter could have written the buy-in insurance.

“It demonstrates a bit more of an open market in novating these swaps,” he said.

Hymans Robertson echoed this, saying the transaction demonstrated that “trustees can retail full flexibility over the eventual buy-in provider”.

Walker-Buckton said the first conversions of longevity swaps to buy-ins were done in 2017, and this year there has been an acceleration of such moves.

“We’re quoting on some more,” he said.

In a statement PIC said a key feature of the new transaction with SHEPS was that PIC was restructuring and stepping into the longevity swap, “and it underpins the buy-in from inception”.

Shepherd and Wedderburn provided legal advice to the trustees and advice on the structure.

Scottish & Southern Energy is a UK energy company with operations and investments across the UK and Ireland. The SHEPS had a surplus of £156.7m at 31 March 2018 on a funding basis and a surplus of £587.1m at 30 September 2019 on the basis of international accounting standards (IAS19).

In a half-year update published today, the company said this, together with the deficit in the Southern Electric Pension Scheme, resulted in a net surplus of £403.9m for both schemes.

The company is no longer making funding contributions to SHEPS for a period until the surplus on a funding basis is negative for two successive quarters, according to the update.