Aon Hewitt predicts a significant increase in the number of longevity swaps during 2014 and 2015 as a result of additional capacity and better pricing from the reinsurance market.
Aon Hewitt calculates that from the reinsurance market alone there will be up to £100 billion in available capacity for pension scheme longevity risk during the next two years. The increased capacity is a result of a more mature market and follows a year of substantial deal volume.
Aon Hewitt, which led the advice on £8 billion of the £8.9 billion in deals completed during 2013, believes this is a reflection of a market which has developed significantly in the last year. While in 2009, when the longevity swap market started, there were at most six reinsurance companies willing and able to offer these types of deals – there are now 15-20 companies proactively operating in this space. The result is a bigger and more competitive market, offering significant opportunity for a broader range of UK pension schemes.
Martin Bird, senior partner & head of Risk Settlement at Aon Hewitt, said:
“In the five years since Babcock International closed the first deal with Credit Suisse, the longevity swap market has evolved significantly and is now able to offer increased capacity and better pricing for UK pension schemes. Originally, these deals were regarded as only right for a very few schemes which were typically very large and usually with an industrial or manufacturing company sponsor.
“During 2013, we saw both the smallest and the biggest longevity swaps so far executed in the market, involving a greater range of schemes in terms of both nature and complexity. With an increase in reinsurance market participants who are willing to execute longevity swaps, a more competitive marketplace and a reduction in transaction lead times as market structures start to become more streamlined, we believe 2014 and 2015 will show significant growth. As schemes continue to gain a deeper understanding of their longevity risk exposures, we see an increasing appetite across a broader range of schemes to make use of the competitive reinsurance market capacity.”
Aon Hewitt believes that while the reinsurance market appetite has increased significantly in recent years, capital markets also offer a future additional pool of funding capacity.
Matt Wilmington, partner at Aon Hewitt said:
“Capital markets remain an additional source of potential capacity in the future, but we believe it is unlikely to materialise in the next two years for several reasons. Primarily, the main challenge is the differing objectives and time horizons of institutional investors compared with pension schemes. While significant tailored capacity is available from the reinsurance market, the capital markets will find it harder to compete. However, this is not insurmountable and we expect to see continued innovation in this market in the coming years, leading to a broader capacity base and set of options for UK pension schemes.”
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