Just £150 billion (€194 billion) of the UK’s £2 trillion defined benefit (DB) pensions sector has been hedged against longevity risk since 2009, research shows.
But Willis Towers Watson, a pensions consulting firm that carried out the research, says pension schemes are increasingly attracted to de-risking and this year could see a further £20 billion of scheme liabilities hedged.
Hedging out of UK pensioner longevity started in 2009 when Babcock International, an engineering firm, transacted the first ever hedge. Hedging is carried out through either longevity swaps or bulk annuity purchases ¬ – though other methods are being created.
Watsons said that early activity in the market this year suggests more pension schemes will move to de-risk their longevity.
In a ‘De-risking report’ by the firm, Shelly Beard, senior de-risking consultant, said: “Based on the conversations we are having with our clients, it is likely that 2016 could see longevity hedging deals covering over £20 billion of liabilities.”
According to Watsons 2015 saw in excess of £10 billion of liabilities transferred to the insurance market through de-risking transactions – much of it from schemes that had previously transacted.
Beard said: “The prominence of longevity risk on schemes’ agendas means that we are expecting to see continuing growth in longevity swap markets. 2014 saw deals covering £25 billion of liabilities, including the record breaking £16 billion hedge for the BT Pension Scheme. This flow of deals continued in 2015 with Axa, Heineken and a further deal for Aviva – some £6 billion of liabilities.”
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