PwC warns of higher longevity-swap costs as competition cools

UK – Pension funds looking to complete a longevity swap face reduced levels of competition among market participants, which risks driving up transaction costs, PwC has warned.

Predicting that the UK longevity swap market could triple in size to £60bn (€69bn) over the next four years, the consultancy cautioned that, if transaction volumes were to increase as predicted, it would lead to capacity problems as reinsurers struggled to cope with deals.

PwC pensions partner Paul Kitson suggested some UK funds had been holding back on longevity transactions as they monitored the market's development.

"This may be a risky strategy, as the market for longevity hedging deals could be heading for a capacity crunch," he said.

"At least one reinsurer has already used up over half of its capacity for these types of risks, and others are directing their resources to the US, Canada and other markets, where deals could be much larger, leaving reduced appetite for UK deals."

Insurers such as Prudential have been hoping for some time that pension funds in markets such as the US would show an interest in de-risking strategies such as buyouts and longevity swaps.

Amy Kessler, head of longevity reinsurance at Prudential, predicted several years ago that longevity risk transfers would become commonplace across the globe.

The insurer has since agreed a $7.5bn (€5.8bn) bulk annuity deal with US telecoms giant Verizon, while car manufacturers General Motors and Ford have also de-risked their US defined benefit funds.

Kitson said: "The geographical origin of longevity risk is of less importance to global reinsurers, so while the UK has passed significant pension scheme longevity risk to reinsurers in recent years, the UK does not have a monopoly on reinsurers."

He added that the £20bn of longevity business transacted in the UK was "only the tip of the iceberg" and urged UK funds to consider their next step.

"We are already seeing the first signs of reduced competition, meaning UK pension schemes that take too long to take advantage of longevity hedging could be left facing limited options and potentially higher prices," he said.

Recent UK longevity deals have included a £400m transaction by the pension fund for car manufacturer Bentley, while BAE Systems in February agreed a £2.7bn deal with Legal & General.