Carillion Group agrees DB pension longevity swap

Support services organisation Carillion Group has entered into a longevity swap for five of its defined benefit (DB) pension schemes.

The longevity swap, which covers around 9,000 pensioners and has a liability of around £1 billion, aims to hedge against the risk of rising costs as a result of the current pensioners of the schemes living longer than expected.

The swap is one of a range of exercises undertaken as part of Carillion Group’s long-term strategy to reduce pensions risk, enhance the security of members’ benefits and increase certainty over future costs.

The longevity swap has been agreed with Deutsche Bank AG, and was advised upon by the pensions team at PricewaterhouseCoopers (PWC) and Mercer.

Advice from PWC and Mercer covered all aspects of the transaction, including feasibility, provider selection, accessing reinsurance capacity, structuring, contractual terms and implementation.

Designing strategy

The consultants worked together to devise and implement a strategy to ensure that the five separate pension schemes, which range in size from approximately £50 million to £400 million, were priced as a single scheme, but were executed as five separate swap contracts. This resulted in reduced costs, but kept the flexibility and characteristics of individual contracts.

Richard Adam, group finance director at Carillion Group, said: “We are delighted the trustee has secured this deal to remove a significant amount of risk at an attractive price.

“The longevity swap reflects Carillion Group’s commitment to ensure the security of the benefits of all our pension scheme members and reducing pensions risks.”

Robin Ellison, chairman of the trustee, added: “Pension scheme liabilities have risen significantly in recent years due to increasing life expectancy.

“The trustee is pleased to announce that by completing this transaction with Deutsche Bank AG, it has hedged this risk for the members covered by the swap thereby helping to improve the security of benefits for all members.”

Andrew Ward, lead advisor to the trustee at Mercer, said: “This is a welcome step in the management of the risks relating to the schemes’ benefit obligations.

“We are delighted to have guided the trustee through this transaction and together with PWC to have secured competitive pricing and terms from Deutsche Bank.

“This is another example of a trustee and sponsor looking to capitalise on the opportunity to manage the risk associated with longevity. We are seeing increasing interest in this area as trustees and sponsors develop their plans to reach a sustainable position in the longer term.”

Paul Kitson, partner in the pensions team at PWC, added: “This was a complex transaction, which required new thinking in tackling increasing life expectancy across a number of schemes. Focused execution management was vital to get the best outcome for the organisation and trustee.”

“This deal shows organisations that sponsor a number of schemes and had previously thought that a grouped longevity swap was not achievable to reconsider their risk management options.”

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“We expect organisations’ appetite to protect themselves against unplanned pension payments from people living longer will continue. Demand for such transactions could raise the risk that over time pricing will increase as reinsurance capacity is used up.

“Schemes and sponsors that are holding back on deals to see how the market and pricing develops could be playing a risky strategy [because] the market for longevity hedging deals could ultimately lead to a capacity crunch, which could lead to higher prices.”