Uncertainty around inflation rates and concerns about market volatility have fuelled a steady increase in the number of pension schemes looking to de-risk their strategies over the past 12 months. Yet while the amount of longevity hedges and pensions buyouts continues to rise – numbers of longevity swaps have only just tipped double figures leading many to ask: where is the market going?
In a recent Clear Path Analysis survey 60% of respondents indicated their surprise at the slow pace of development with 80% suggesting this was due to costs and complexities of the transactions. Furthermore 60% of pension schemes stated that counterparty risk is gradually becoming the single most critical issue to address when considering a longevity hedge or buy-out transaction.
With pensioners living on average two to three years longer than a decade ago, longevity swaps and vehicles for pension schemes to relieve their risk is now a ‘must have’ discussion point on trustee agendas. Indeed ITV’s £1.7bn longevity swap benefitting just under 12,000 people, is a prime example of this trend. The third annual Pension De-Risking; Longevity Hedging and Buying Out speaks to many experts about this topic.
Tiziana Perrella, Principal at JLT Pension Capital Strategies, states: “The growing appetite for de-risking is evidenced by the phenomenal growth in market activity over the past few years. The additional competition introduced by a number of new entrants has put downward pressure on prices, which remain very good value in terms of the risk passed across.”
She emphasises: “Insurers are able to invest in a larger and more sophisticated asset mix than even the largest of pension schemes; they can better assess the longevity risk and manage it, through reinsurance or as a result of the mix of business on their books; they can administer schemes efficiently through economies of scale.”
Kelvin Wilson, Head of Pension Risk Solutions at Grant Thornton UK LLP notes how the market is reacting: “The de-risking market is responding to trustee and employer concerns regarding the cost and financing of de-risking solutions. Solutions are now being offered that are bespoke to the profile of pension scheme liabilities, level of funding and the strength of the employer's covenant. Schemes holding gilt investments may find that the cost of de-risking their pensioners, using a buy-in solution, might have come down relative to the cost of funding.”
“Scheme trustees and sponsors now understand the importance of good risk management and many of them want to manage their pension risks better. Despite deteriorating funding levels, sponsors and trustees are taking advantage of the rise in value of their gilt portfolios to de-risk their current pensioners.” added Wilson.
In an interesting roundtable Andrew Reid, Managing Director, European Head of Pensions Origination, CMTS at Deutsche Bank highlights the complexities of the different options: “From a provider’s perspective, it varies between de-risking schemes, and the solution from one to another varies significantly. The better funded schemes are investigating bulk annuities. In the large to medium end of the pension scheme scale, there is more interest in unfunded longevity only hedges, or longevity plus a few ancillary risks like proportion of married and age difference hedging, rather than a buy-in.”
Reid also stresses the positive effect on company shares of hedging longevity: “There have been cases of very positive market reaction to hedging longevity risk, with companies' share prices reacting favourably."
Isabel France, Partner at Linklaters, underlines the need for specialist advice and warns of counterparty risk: “Very often, the circumstances which make such a transaction appropriate come together at the last minute – and the parties then need to move quickly and prior preparation will help smooth any transaction. The trustees will be taking on counterparty risk in any transaction. They will want to understand what kind of entity is the counterparty, what safeguards exist if that counterparty becomes insolvent and are there options which can improve that position.”
|
