Babcock hedges risk of longevity in its pension schemes

Babcock International will become the first UK company to offset the risk of retirees outliving expectations, in a deal that is likely to mark the beginning of a trend.
The engineering company is setting up an arrangement known as a longevity swap on two of its pension schemes. These are agreements with banks or insurance companies, whereby the pension trustees estimate how long retirees will live. If any pensioners live longer than expected, Babcock will be compensated for the extra cost of their pension payments. If they die earlier than anticipated, the bank will benefit from the deal. The swap effectively caps the cost of pension payments, and removes longevity risk from the scheme.
The deal covers current retirees, who make up around 45% of the scheme’s liabilities. It will run for 50 years.
Consultants expect rapid growth in demand from finance directors. Nick Flint, managing director of Longevity services company Club Vita, says: “This will be the start of a number of transactions. We will see quite a lot more of this in the marketplace once companies know enough about the pattern and character of longevity within their scheme to enable them to negotiate the right terms. Right now, many will just want to monitor longevity, so they are in a position to move on this later.
“Many more providers will be looking to offer solutions. The whole marketplace for longevity hedging products is in its infancy. It is likely to evolve over the coming years.”