Mercer lead advisor on ground-breaking £90m streamlined longevity hedge completed by UK pension plan with Zurich

2 mins read

The FINANCIAL — Mercer, as lead advisor to the Trustees, announces today that a longevity hedge has been agreed between an undisclosed UK pension plan (the “Pension Plan”) and Zurich Assurance Limited (“Zurich”).

This streamlined longevity hedge, structured as a “whole of life” insurance policy, will hedge against the risk of rising costs as a result of the current pensioners of the Pension Plan living longer than expected. The hedge is “named life” meaning it covers around 200 named Pension Plan pensioners and contingent dependants. The total liability for these members is around £90m.  Mercer acted as the lead advisor on the transaction, covering all aspects including feasibility, provider selection, accessing reinsurance capacity, structuring, contractual terms and implementation as part of a streamlined longevity hedge platform. Zurich worked with Mercer and Pacific Life Re to establish a set of streamlined processes for operating an arrangement of this size, according to Mercer.

Suthan Rajagopalan, lead transaction adviser and Head of Longevity Reinsurance at Mercer, commented: “Mercer is delighted to have helped the Pension Plan Trustees to be the first to transact a streamlined named life longevity hedge. Mercer worked closely with the Trustees over a number of months to test feasibility, broker competitive longevity reinsurance pricing, train the Trustees on Zurich’s streamlined longevity hedge, prepare for and execute implementation.”

Mr Rajagopalan continued, “Before this transaction, ‘named life’ longevity hedges were exclusive to the largest schemes with over £400m of pensioner liabilities. This deal unlocks the door to competitive longevity reinsurance pricing for small and medium sized schemes which are more exposed to so called concentration risk where there is greater variability in members’ life expectancy due to diverse pension amounts in smaller populations. Mercer’s co-ordination of the whole value chain culminated in immediate reinsurance by Zurich with Pacific Life Re to minimise the longevity risk transfer cost for the Trustees. This has never been achieved before for a deal of this smaller size.”

The Chairman of the Trustees said “The Pension Plan was an early adopter of interest rate and inflation hedging and the Trustees are pleased to seize this early opportunity to hedge longevity risk for its pensioners and their dependants. This transaction helps to improve the security of benefits for all members by removing the uncertainty of future costs to the Plan arising from existing pensioners living longer than forecast. We retain our ability to manage our investments to meet the Pension Plan’s future liabilities and flexibility for further de-risking. Mercer has done an excellent job in advising the Trustees and sourcing this de-risking opportunity and delivered an attractive outcome for the Pension Plan.”

Simon Foster, Managing Director of Corporate Life and Pensions for Zurich UK, commented “We are excited to play our part in this innovation in the longevity market.  Working with the Trustees, Mercer and our reinsurers, we have been able to demonstrate that exposure to these risks can be managed at much lower liability levels than previously assumed.”

Alastair Walker, Principal at Mercer and Scheme Actuary for the Pension Plan, added, “The Trustees expressed interest in longevity hedging some time before streamlined solutions became available and had ruled out bulk annuities due to the costs and upfront premiums required. Being a named life hedge, the longevity risk transferred includes both uncertain longevity improvement trend rates and concentration risks. This transaction has reduced risk, enhanced the security of members’ benefits and increased certainty over future funding costs. The hedge is unfunded so no premium has been paid upfront retaining investment flexibility for the Trustees.”

Mr Rajagopalan concluded, “This is an exciting development and there are other streamlined longevity hedges in the implementation phase.  Smaller pension schemes like this one can now benefit from a strong pre-negotiated standard longevity insurance contract developed between Mercer and Zurich with competitive pricing tension provided by Mercer’s panel of longevity reinsurers who ultimately share the longevity risk.”


Leave a Reply