Pensions, investments and employee benefits consultancy Mercer and Zurich Insurance have launched what they describe as the UK’s first competitively-priced longevity hedge accessible to most UK defined benefit (DB) pension schemes.
Mercer, which launched a fiduciary management dynamic de-risking solution (MDDS) to the market in 2009 to address implementation difficulties arising from sophisticated de-risking, said that it is now bringing that same scale and operational efficiency to the longevity hedging market.
The longevity hedge implementation, aka ‘streamlined longevity solution’, is the first of its type in the UK, with its associated panel of re-insurers. It is aimed at UK DB pension schemes with pensioner liabilities of £50m or more.
“Demand for DB de-risking solutions is increasing,” said Alan Baker, Mercer’s UK head of DB risk.
“Combining longevity hedging with our successful fiduciary management service, this is an innovative, practical step opening up a cost-effective DB de-risking approach to schemes of all sizes. It’s a lower risk, higher return solution compared to alternatives like a pensioner buy-in.
“We have pre-agreed hedging terms with a panel of reinsurers fronted by Zurich, to allow clients access to the best prices because getting them competitive deals is crucial. It’s unique and we’re delighted to offer it in partnership with such a well-known global insurer.”
Mercer noted that historically, the complexity and advisory costs of a longevity hedge – where an insurer assumes the longevity risk and cost of a section of a pension scheme’s members in return for a premium – have meant that their use in pension scheme de-risking has been restricted to larger DB schemes of typically £1bn plus of liabilities.
Insurers and reinsurers have found quoting on smaller schemes prohibitive due to the high transaction costs involved and the complexity of each bespoke deal.
According to Dan Melley, Mercer’s UK head of fiduciary management: “Most organisations are faced with two options: manage the risk on the balance sheet or transfer it in full, with a significant premium cost.
“While each option will rightly have its place with many companies, our SmartDB solution provides a third way. Organisations of all sizes can now access a more complete hedging and governance solution, eliminating many of the risks at more manageable cost. Extending our capabilities to include a longevity hedge will greatly assist our clients as they seek to manage the risks of their DB liabilities”.
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