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Aon Hewitt: Recent Longevity Swap Transactions Just the Start of a Busy 2012 in Risk Settlement Deals


Posted on 09 Jan 2012

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Aon Hewitt, the global human resource consulting and outsourcing business of Aon Corporation, has said today's announcement that the Pilkington Superannuation Scheme has entered into a longevity swap of around £1 billion with Legal & General (on which the lead advisers were Aon Hewitt), underlines a renewed focus on longevity risk management and the likelihood of a very active risk settlement market during 2012.

Market Outlook for 2012

Martin Bird, managing principal at Aon Hewitt and head of the Risk Settlement Group said: "The end of 2011 and now the start of 2012 have seen a flurry of activity on large-scale longevity swap transactions, with £6 billion of deals announced, including Rolls Royce/Deutsche Bank and Pilkington/Legal & General (L&G). In addition, we have also seen a pick-up in activity in the buy-in market, including a £1.1billion deal for Turner & Newall/L&G and one of £800m for Uniq/Rothesay Life.

"This activity built up through 2011 and highlights the ongoing focus on managing pension risk, with both trustees and sponsors aiming to protect funding positions, manage cash contributions and reduce the volatility arising from significant legacy pension liabilities.”

Martin Bird continued:?"The longevity swap market in particular is really emerging as a major influence and we now have a critical mass of deals announced.  With that we are starting to see some real standardisation in deal structure, which is helping to make these deals accessible across a much wider range of schemes."

Aon Hewitt has invested heavily in building up its market-leading Risk Settlement Group, which helps clients to navigate through the complex risk settlement market and to identify transactions that are appropriate for specific needs and objectives.

Martin Bird said: "With the deals on which we have worked - both during 2011 and before - we can claim to be the leading advisor in the longevity swap market, and we look forward to helping more clients successfully execute risk settlement deals during the course of 2012. The overall risk settlement market, including longevity swaps, buy-ins and a number of other innovative means of transferring risk to the insurance and capital markets, is helping schemes and sponsors to take a much more pro-active approach to managing pension risk."

Longevity deals – the recent history?Pilkington joins ITV, Rolls-Royce and British Airways in having announced a large longevity swap transaction.

Together with the swaps transacted by Babcock, BMW, RSA and the Royal County of Berkshire during 2009 and 2010, the total number of pension fund longevity swaps has risen to 12, covering approximately £16 billion of pension scheme liabilities.
Matt Wilmington, principal at Aon Hewitt and lead adviser on the Rolls-Royce and Pilkington transactions added:

"Both the Rolls-Royce and Pilkington trustees entered into their longevity transactions as a way of improving the security of all the members' benefits. In both cases, we worked closely with the trustees to identify an appropriate approach and deal structure.

"Longevity swaps are attractive for many schemes as they specifically remove longevity risk, without disturbing schemes' existing investment arrangements. This can be particularly helpful where schemes are relying on their asset portfolios to deliver returns to fund ongoing contributions and to help address existing funding deficits. However, continued improvements in life expectancy and the associated longevity risk are not something which many schemes and sponsors are prepared to chance, and so having the ability to remove that risk on cost effective terms has been a key driver in a number of deals.”

Matt Wilmington added:?"But the market and the ways to approach these issues are evolving. The ability to add longevity swaps to an existing liability-driven investment portfolio in order to create a synthetic buy-in solution in-house, means that schemes have a real alternative to insurance buy-in solutions.  That change should be helpful in creating a genuinely competitive market for risk settlement deals."

Lynda Whitney from Aon Hewitt's Risk Settlement Group and lead adviser to the Trustee of the Pilkington Superannuation Scheme said:

"As lead advisers on the Pilkington transaction we worked with the Trustee of the Pilkington Superannuation Scheme to help them to understand and then reduce the longevity risk to their scheme. It is a key step in the trustee strategy to reduce risk and to help ensure the security of members' benefits"


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