Actuarial Post (United Kingdom)
July 30, 2013


PwC analysis predicts the UK pension fund longevity hedging market could triple over the next three years, raising questions over the capacity of reinsurers to take on the risks of this growing market.

UK pension schemes are increasingly looking to protect themselves against an increase in life expectancy for their pension plan members, which can leave schemes paying out millions more in pension payouts than they have planned for. Over £20bn of longevity swaps have been written by UK pension schemes since the market first emerged in 2009. PwC expects significantly more transactions this year and predicts the market could reach £60bn by 2016. [EXPAND Read more]

PwC warns that if the number of longevity swaps grows as predicted, this could lead to a capacity crunch in the market. This is because many global reinsurers, which typically take on these deals, are increasingly filling their capacity and/or moving their focus to other countries where defined benefit pension provision is also prominent but deal sizes are bigger. This may mean the number of reinsurers interested in a UK pension scheme longevity transactions could reduce and could lead to increases in the price to hedge longevity. Significant competition from reinsurers has been one of the causes of reduced longevity hedging pricing over recent years.

Paul Kitson, pensions partner at PwC, said:

“While many UK pension schemes are actively considering longevity hedging as a key way to reduce risk in their schemes, many have been holding back on deals to see how the market and pricing develops. This may be a risky strategy as the market for longevity hedging deals could be heading for a capacity crunch. At least one reinsurer has already used up over half of its capacity for these types of risks and others are directing their resources to the US, Canada and other markets where deals could be much larger, leaving reduced appetite for UK deals.

“The geographical origin of longevity risk is of less importance to global reinsurers, so while the UK has passed significant pension scheme longevity risk to reinsurers in recent years, the UK does not have a monopoly on reinsurers. Defined benefit pension plans in other countries are now looking at similar transactions meaning potentially less capacity for UK deals.

“The £20bn of longevity swaps already written in this market is only the tip of the iceberg given the £1.5trn of private sector defined benefit pension liabilities in the UK.

“We are already seeing the first signs of reduced competition, meaning UK pension schemes that take too long to take advantage of longevity hedging could be left facing limited options and potentially higher prices.” [/EXPAND]