Mercer and Zurich in £300m streamlined longevity hedge deal

Mercer and Zurich have struck a £300m streamlined longevity hedge deal, taking the level of such deals done since December 2015 beyond £1bn.

dealThe deal, which Mercer says is the fifth of its kind, covers £300 million of pensioner liabilities, with a streamlined hedge arrangement delivered by Zurich and reinsured by SCOR. The identity of the pension plan has not been disclosed.

Zurich has reinsured 80 per cent of the longevity hedge with SCOR retaining 20 per cent.

The hedge, structured as a whole of life insurance policy, aims to protect against the risk of rising costs resulting from current pensioners living longer than expected. The hedge is “named life” meaning it covers around 2,300 named pensioners and future dependants.

Mercer lead transaction adviser and head of longevity reinsurance Suthan Rajagopalan says: “This is the fifth streamlined longevity swap executed in about a year since the first such deal was announced in December 2015. This marks the first deal, on the platform set up by Mercer, where SCOR have been awarded the reinsurance and follows on from the smallest ever such deal at £50m announced in October 2016. Before these five transactions, named life longevity hedges were exclusive to only the largest schemes with over £400m of pensioner liabilities and deal sizes averaged £2bn.

“These deals pave the way to competitive longevity reinsurance pricing for small and medium sized schemes which are more exposed to so-called “concentration risk” where there is potential for greater variability in members’ life expectancy due to diverse pension amounts.

The Chairman of the Trustees says: “The pension plan had already decided that an actual bulk annuity was not desirable in the short to medium term due to the desire to maintain rewarded investment risk exposure and for Mercer to dynamically de-risk as investment market opportunities permitted. 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.”

Zurich chief operations officer Jim Sykes says: “This deal demonstrates how using a panel of reinsurers really does provide competitive pricing for smaller liability transfers, and we are very pleased SCOR is our reinsurance partner this time. With five hedges announced in just over a year, our longevity business is a growing and complementary part of our corporate business, demonstrating our ability to retain longevity risk and deliver pensions solutions to a rapidly increasing number of employers.”

SCOR global head of longevity Rupen Shah says: “SCOR’s large portfolio of mortality risk positions us as a natural holder of longevity risk.  This diversifies the deployment of SCOR’s appetite for longevity risk alongside reinsurance of insurer annuity business and “traditional“ longevity swaps for larger pension scheme and positions SCOR well for future streamlined longevity swaps.”