Mercer and Zurich have launched the UK’s first competitively-priced longevity hedge accessible to the majority of the UK’s defined benefit (DB) schemes.
Having originally brought a fiduciary management Dynamic De-risking Solution (MDDS) to the market in 2009 to address the implementation difficulties associated with sophisticated de-risking journey plans, Mercer are now bringing that same scale and operational efficiency to the longevity hedging market. The longevity hedge implementation (“Streamlined Longevity Solution”) is the first of its type in the country, with its associated panel of re-insurers. It is aimed at UK DB pension schemes with pensioner liabilities of £50m or more.
“Demand for DB de-risking solutions is increasing,” said Alan Baker, Mercer’s UK Head of DB Risk, “Combining longevity hedging with our successful fiduciary management service, this is an innovative, practical step opening up a cost-effective DB de-risking approach to schemes of all sizes. It’s a lower risk, higher return solution compared to alternatives like a pensioner buy-in. We have pre-agreed hedging terms with a panel of reinsurers fronted by Zurich, to allow clients access to the best prices because getting them competitive deals is crucial. It’s unique and we’re delighted to offer it in partnership with such a well-known global insurer.”
These services can also be combined with actuarial, administration and governance services as part of the new Mercer SmartDB service.
Historically, the complexity and advisory costs of a longevity hedge - where an insurer assumes the longevity risk and cost of a section of a pension scheme’s members in return for a premium - have meant that their use in pension scheme de-risking has been restricted to larger DB schemes of typically £1 billion plus of liabilities. Insurers and reinsurers have found quoting on smaller schemes prohibitive due to the high transaction costs involved and the complexity of each bespoke deal. The hedge - and the other services provided within Mercer SmartDB - means that UK DB pension schemes of all sizes now have more de-risking options open to them.
Simon Foster, Head of Corporate Life and Pensions, UK and International Savings, Zurich, said: “We are delighted to be working with Mercer and our reinsurance partners to bring this solution to smaller and mid-size DB schemes, for which longevity hedges were not previously easily available.
“DB pensions have been facing significant funding challenges in recent years from people living longer and uncertain economic conditions. As a result, most have closed to new members, and many have stopped future accrual, with the focus now moving to stabilise existing liabilities. Given the clear market need, and Zurich's strategic focus on providing innovative solutions for corporate customers to better manage their risks, this is a natural extension to our UK proposition.”
According to Dan Melley, Mercer’s UK Head of Fiduciary Management, “Most organisations are faced with two options: manage the risk on the balance sheet or transfer it in full, with a significant premium cost. Whilst each option will rightly have its place with many companies, our SmartDB solution provides a third way. Organisations of all sizes can now access a more complete hedging and governance solution, eliminating many of the risks at more manageable cost. Extending our capabilities to include a longevity hedge will greatly assist our clients as they seek to manage the risks of their DB liabilities.”
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