UK - JP Morgan and Mercer have announced the first longevity hedge for non-retired pension scheme members, in a deal worth £70m (€81m).
The agreement, hailed as a significant first step towards allowing longevity risk to be hedged on the capital market, was struck with the trustees of the Pall (UK) Pension Fund.
Longevity will be measured by JP Morgan's LifeMetrics longevity index, with the scheme receiving a payout if life expectancy rises above the rate specified in the contract.
Andrew Thomson, chairman of the Pall scheme's board of trustees, said it came to the arrangement to offset the increases in longevity it had been confronted with over the last decade. The longevity hedge, which runs 10 years, will now cover the scheme if any non-retired members live longer than expected.
Gordon Fletcher, risk consultant at Mercer who also advised the scheme, said that generally, the uncertain life expectancies of those scheme members yet to retire posed a greater risk to pension funds.
He added: "Current practice has been to focus on mitigating pensioner risk, so this new transaction marks a huge advance in the longevity risk market place. It is flexible with minimal cash implications on day one and is, therefore, likely to be of interest to many occupational pension plans that are actively de-risking."
He further told IPE: "This deal, it goes straight to the heart of the people who are currently not retired, the 40 year olds that previously were not covered."
"You have a longer period of uncertainty for 40 year olds, you have 40 or 50 years of uncertainty, opposed to 20 or 30 years," he explained.
David Epstein, head of longevity structuring at JP Morgan added: "Index-based hedges are particularly well suited to hedging the longevity risk of pension plans with significant deferred and active members.
James Mullins, senior liability management specialist at Hymans Robertson hailed the deal for its significance, as it would bring the reality of longevity risk traded on capital markets one step closer.
Mullins said: "That position is increasingly looking like a real prospect within the medium term, with many capital providers showing strong interest in this risk given the massive demand from UK pension schemes to transfer their longevity risk to third parties."
Aon Hewitt's Martin Bird, the consultancy's head of longevity and risk solutions, said the deal meant the market would become more accessible for smaller schemes, as well as making easier any further deals where the liabilities of active and deferred members are unclear.
"We await further standardisation in relation to index transactions from the Life & Longevity Markets Association (LLMA), as it needs a uniform and fungible market to really develop," he said, adding that while the LLMA had started with such a development, Aon Hewitt looked forward to further growth.
However, Andrew Gaches, longevity consultant at Club Vita said the transfer presented two clear challenges.
"Firstly, the deal is only for a fixed, 10-year period. This means the scheme is only gaining short-term, partial protection against its longevity risk.
"Secondly, and perhaps more importantly, the index that is being used as the basis of this deal may not be truly reflective of the scheme members at hand," he said.