The Trustee of the MMC UK Pension Fund (the “Fund”) has announced the largest longevity risk transfer for a UK pension fund since 2014. The transaction, which reinsures the longevity risk of £3.4 billion ($4.3 billion) in pension liabilities, will provide long-term protection and income to the Fund in the event that the covered participants live longer than expected. It also lowers the risk that Marsh & McLennan Companies will face unexpected pension contributions due to an increase in pensioner life expectancy.
In order to efficiently transfer the longevity risk from the pension plan without the payment of an upfront premium, the Trustee established a wholly owned insurance company on the ‘Mercer Marsh’ captive platform with its own independent board of directors.
The Fund’s Trustee selected Prudential Financial and Canada Life Reinsurance for the longevity reinsurance that helps secure the pensions of about 7,500 plan participants. The reinsurance is divided equally between the two reinsurers. Mercer Ltd led the advice on this important transaction.
This is Prudential’s second reinsurance agreement using a captive structure: The first was the record £16 billion longevity risk transfer transaction with the British Telecom Pension Scheme in 2014.
“The MMC UK Pension Fund transaction reflects the fact that de-risking is the new normal,” said Amy Kessler, head of longevity risk transfer at Prudential. “In every industry peer group, companies are choosing to reduce the longevity risk embedded in their pensions through buy-ins, buy-outs and longevity hedging. Today, a full range of solutions exist to help secure pension promises and reduce risk to funding levels.”
William McCloskey, the head of international longevity transactions at Prudential said, “We are proud the MMC UK Pension Fund and its captive insurer have entrusted their longevity risk transfer to us. This significant transaction highlights the importance of the captive solution in longevity risk transfer and proves the captive remains an important option for trustees to efficiently and cost effectively transfer longevity risk in the manner that works the best for them.”
“There remains a great deal of uncertainty with regard to future longevity improvements. Pension plans that decide to keep their longevity risk rather than hedge it are maintaining a risky strategy,” said Kessler. “The timing may be particularly good for non-U.K. sponsors to accelerate their de-risking plans to take advantage of comparatively low sterling exchange rates.”
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