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Mercer leads advice on first longevity swap to be transacted for a Group of the Electricity Supply Pension Scheme
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Second longevity swap transaction for ScottishPower following their £2bn longevity swap in 2015
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Swap covers £1bn of pensioner liabilities with significant risk management achieved post-EU referendum
This longevity swap, structured as a tri-partite insurance policy between the Electricity Pension Trustee Limited, the Group Trustee and Abbey Life, will hedge against the risk of rising costs as a result of the current pensioners of the Group living longer than expected. Mercer acted as the lead advisor on the transaction, covering all aspects including feasibility, provider selection, accessing reinsurance capacity, structuring, contractual terms and implementation.
Andrew Ward, Head of Longevity Risk Management at Mercer, commented, “We’re delighted to have helped the Group be the first member of the Electricity Supply Pension Scheme to manage their longevity risk in this way. We worked closely with the Trustees to achieve a successful outcome for all parties, thus allowing the Group and ScottishPower to continue to reduce the long term volatility of their pension costs in an efficient manner - an approach that is encouraged by Ofgem, the UK Energy Regulator.”
Mr Ward continued, “Longevity risk is a significant risk for defined benefit schemes and is more significant than ever in the historically low-yield environment. As part of this transaction, we have managed a highly competitive pricing process to remove this long-term risk at an attractive cost demonstrating that substantial risk management is still possible post-EU referendum.”
Group Trustee Chairman, Graham Wardle of BESTrustees, said: “Rising life expectancy has led to significant increases in UK pension scheme liabilities over the past couple of decades. By implementing this longevity swap, the Group has taken a major step in removing this risk in the future. We would like to thank Mercer for their clear advice and efficient management of this process which has led to a positive result for the Group.”
Steven Blackie, Mercer’s UK Head of Investments and investment adviser to the Group, added, “Manweb have a long-term strategy to reduce pension risk over time. This is consistent with that objective and helps enhance the security of members’ benefits and increase certainty over future costs.”
“We expect to see significant longevity risk management activity in 2016,” concluded Mr Ward. “In addition to the continued use of tried and tested insurance structures, there continues to be innovation to increase the range and efficiency of options to manage this risk. These range from streamlined solutions available for small schemes, to ‘captive’ or ‘pass-through’ structures for larger schemes – all of which aim to reduce costs and increase flexibility.”
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