Marking its entry into the longevity insurance segment of the UK’s defined benefit pension scheme risk transfer market, Legal & General (L&G) has finalised a deal with the Pilkington Superannuation Scheme (PSS).
Under the agreement, L&G has insured the PSS against the risk of 11,500 current pensioners living longer than expected. About £1bn ($1.5bn) of associated liabilities are involved.
The PSS deal follows L&G’s recent closure of a buy-out deal with the trustees of the Turner & Newall Retirements Benefit Scheme, Alexander Forbes, worth around £1.1bn.
The deal is the largest buy-out so far recorded in the UK market.
In the PSS deal L&G is not taking the full risk on to its books. L&G has entered into a longevity reinsurance agreement with Hannover Re, the details of which from L&G’s perspective were not released.
However, Hannover Re, a 50.2%-owned unit of German insurer Talanx, has provided more detail.
“Hannover Re is to take over the bulk of the business, while the rest will remain with Legal & General,” said the reinsurer in a release.
The reinsurer added that it has assumed the biometric risk, not the investment and inflation risks.
Hannover Re anticipates premium income of about £800m over the entire term of the transaction, with some £60m attributable in its 2012 financial year.
“With this transaction we are cementing our leading position in the attractive longevity risks market,” commented Hannover Re CEO Ulrich Wallin.
“We anticipate good business opportunities since it is likely that companies will increasingly seek to limit their direct pension obligations.”
Hannover Re emphasised that the assumption of longevity risks also forms an attractive part of its risk management strategy.
This, the reinsurer explained, is because longevity risks are negatively correlated with mortality risks and hence promote better diversification of the portfolio.
Hannover Re stated that through its involvement in enhanced annuities its activities in the area of longevity risks go back as far as the mid-1990s.
“Since concluding its first longevity block transaction in 1998, Hannover Re has assumed pension obligations totalling altogether around €5bn [$6.4bn], concentrating primarily on the blue-collar workers’ segment,” noted Hannover Re in its statement.