The trustees of the Pall UK pension fund have completed a longevity index hedge to mitigate the risk of increased life expectancy for the scheme’s non-retired members.
The fund has entered into a £70 million contract with JP Morgan based on future values of its LifeMetrics longevity index.
Previous longevity deals have focused on retired members only, which makes this transaction one of the first of its kind globally. Hedging against increased life expectancy of pension plan members who have yet to retire has, to date, been problematic due to the long-term nature of the risk and the difficulties associated with accurately hedging pension benefits that have yet to come into payment.
The hedge has a term of 10 years during which the fund’s trustees may choose to adjust the size and composition of the swap or decide on an alternative solution. The transaction requires no up-front cash and so the fund’s sponsoring employer does not need to contribute additional resources into the fund.
The agreement results in the fund receiving a payout if life expectancy improves at a greater rate than specified in the contract, and so allows the fund to offset its liabilities.
Andrew Thomson, chairman of the trustees at Pall UK, said: “Like other pension plans, our fund has been hit by significant life expectancy rises over the last decade. This flexible and innovative arrangement helps us manage the key risk of longevity.”
Gordon Fletcher, a risk consultant at Mercer and lead adviser to the trustees, added: “In general, the uncertain life expectancies of people still yet to retire pose a far greater risk to pension plans than those who have retired.
“Current practice has been to focus on mitigating pensioner risk, so this new transaction marks a huge advance in the longevity risk market place. It is flexible with minimal cash implications on day one and is, therefore, likely to be of interest to many occupational pension plans that are actively de-risking.
“We are in active conversations with both UK and international pension plans that are de-risking and, with similar longevity indices for the UK, US, Germany and Netherlands, we anticipate international interest in this development.”
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