Towers Watson confirms that it was the lead actuarial adviser on longevity insurance and reinsurance agreements that have been entered into to protect the BT Pension Scheme against the cost associated with increases to life expectancy. Towers Watson has advised on a structure whereby BT Pension Scheme has set up and transferred longevity risk to a wholly owned insurance company. The Prudential Insurance Company of America, a US based life insurance company, has then reinsured the longevity risk transferred. The agreements cover £16bn of pension liabilities, making this by far the biggest longevity risk transfer to date.
Ian Aley, a senior consultant at Towers Watson who advised the BT Pension Scheme’s Trustee, said: “This transaction was the result of a thorough review of the scheme’s risk exposures and the options for reducing these, followed by a competitive selection process.
“Until recently, it would not have been possible to hedge anything like this much longevity risk in one go. This transaction is three times bigger than anything a UK pension scheme has put in place before, and that record was only set this year*.
“A strong appetite from reinsurers means that very large deals are now possible. A ground-breaking structure also meant that there was no intermediary wanting to limit how much risk passed through its balance sheet.”
By setting up a wholly owned insurance company, the Scheme was able to approach a range of reinsurers directly. Reinsurers only transact with insurers and banks, and not with pension schemes.
Ian Aley said: “Usually, a pension scheme will pass longevity risk to an insurer or a bank, which will then reinsure it. That means paying a cut to an intermediary, which will have its own requirements for the transaction.
“We do not expect schemes establishing their own insurers to become the standard template for transferring longevity risk. The approach made sense here because the BT Pension Scheme understands the investment techniques involved and because the transaction was so large. However, we have developed other solutions to help our clients access the reinsurance market efficiently.”
Towers Watson says that more pension schemes are turning their attention to reducing longevity risk, either though longevity insurance or swaps and through exchanging their low-risk assets for annuities.
Ian Aley said: “Many pension schemes have reduced the risk in their investment strategies, so longevity is now a bigger part of their total risk. When looking to hedge this, it’s important to remember that reinsurers are a big influence on price even when they are not the transaction counterparty.”
“We expect to see this kind of structure replicated by several other schemes in the near future,” said James Mullins, head of risk transfer solutions at Hymans Robertson, who helped advise Prudential on the transaction. PICA was advised by Willkie Farr & Gallagher LLP with support from Clifford Chance LLP.
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