In the third quarter of this year, the UK’s pension scheme risk
transfer market put on its best showing yet, with deals struck
exceeding the previous quarterly record by more than £1 billion.
The surge in activity was led by the first longevity swap deals –
considerably more of which are anticipated in the near

Ending a declining trend, the UK’s final salary pension scheme risk
transfer market rebounded in the third quarter of 2009 with total
deals struck surging to a record £3.86 billion ($6.3 billion),
reveals actuarial consultancy Hymans Robertson.

In the well-established pension scheme buyout/buy-in sector, the
value of the 46 deals struck totalled £958 million – an increase of
58 percent compared with a total of £604 million from 37 deals in
the previous quarter.

However, while third-quarter deals represent a solid recovery they
fell far short of the 84 deals worth a total of £2.1 billion struck
in the third quarter of 2008. Overall the buyout/buy-in sector
recorded 127 deals worth £2.45 billion in the first nine months of
2009, significantly below the £6.3 billion recorded in the first
three quarters of 2008.

During the first three quarters of 2009, UK insurer Legal &
General (L&G) remained the buyout/buy-in market sector leader,
closing 67 deals worth a total of £747 million. Hard on L&G’s
heels was risk transfer specialist insurer Lucida, which clinched a
single £500 million deal with the Merchant Navy Officers’ Pension
Fund. Lucida is backed by private equity firm Cerberus Capital

Lucida edged Pension Insurance Corporation (PIC) from the second
position it held in 2008 into third in the first three quarters of
2009. But it was by a narrow margin, with PIC closing six deals
worth a total of £493 million.

Notably absent in the first three quarters of 2009 was UK insurer
Prudential, a pioneer of the pensions risk transfer market which
held third position in 2008 with deals worth £1.37 billion.

Big boost

Giving the risk transfer market its big boost in the third quarter
of 2009 were three first-of-their-kind longevity swap deals worth a
total of £2.9 billion, said James Mullins, a senior liability
management specialist at Hymans Robertson. In essence, longevity
swaps help pension schemes remove the risk that their pensioners
live longer and are often combined with inflation swaps and
interest rate swaps to further reduce risk.

The first longevity swap was announced in June and was executed by
Swiss bank Credit Suisse for UK engineering support services
company Babcock International’s four defined benefit (DB) pension
schemes. The solution involved capping Babcock’s exposure via
longevity swaps whereby its DB scheme will receive payments from
Credit Suisse should members and dependents covered live beyond a
pre-defined age. A second deal was executed in September, bringing
the value of swaps undertaken by Credit Suisse for Babcock in the
quarter to £1 billion.

Also making an entry into the longevity swap sector was Rothesay
Life, a wholly-owned unit of US investment bank Goldman Sachs which
entered the UK pension scheme risk transfer market with a single
£750 million buyout deal in February 2008. Again in a single deal,
Rothesay Life announced in July 2009 that it had executed a £1.9
billion longevity swap for the UK pension schemes of general
insurer RSA Insurance Group. The deal was also the biggest yet in
the pension scheme risk transfer market.

“It seems clear that quarter three 2009 will be remembered as an
important milestone for the longevity swap market,” commented

Richard Shackleton, a partner at Hymans Robertson, noted that it is
likely that some “highly material longevity swaps” will be
completed during the fourth quarter of 2009.

“We fully expect longevity hedging to continue to receive
significant interest during the remainder of 2009 and beyond,” said

Growing interest in de-risking DB schemes and in longevity swaps in
particular was confirmed by a recent survey by Lucida of trustees
and scheme managers representing over £100 billion of assets.

“De-risking is becoming increasingly important as trustees come to
terms with the fallout from the financial crisis,” said Lucida’s
executive chairman, Jonathan Bloomer. “Funding levels and the
overall security of the employer covenant are now major

Underscoring rising concern among trustees, the combined deficit of
the UK’s 200 largest DB funds soared by £15 billion to £77 billion
in October, according to Aon Consulting. This was marginally below
the second-highest deficit yet, £78 billion, in August 2009.

Confirming Hymans Robertson’s view on longevity swaps, Lucida’s
survey revealed that 60 percent of DB schemes have recently
reviewed their longevity assumptions. Following the reviews, 95
percent strengthened their longevity assumptions.

Though Lucida found that pension schemes looking at derisking
favour the buyout/buy-in route, a quarter expressed interest in
longevity swaps, a solution which Lucida pointed out “was barely on
the horizon last year”.

Deals struck


risk transfer