On July 4, 2014, the trustees of the BT Pension Scheme in
the U.K. announced a record-breaking longevity risk transfer transaction that
will provide long-term protection and income to the pension scheme in the event
that members live longer than expected.
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In an important step for the market, the trustees
established a wholly owned insurance company, which has reinsured the longevity
risk with the Prudential Insurance Company of America. The transaction covers approximately £16
billion (over $27 billion) in pension liabilities or 25% of BTPS’ longevity
risk exposure.
The BTPS transaction is the largest transfer of pension risk
to date and proves that the biggest defined benefit pension funds in the world
have a clear and tested path to a lower risk future. They can combine their own
world-class asset management with cost-effective longevity risk cover, which is
available in the global reinsurance market in the tens of billions.
The innovative structure and approach pioneered by BTPS can
be used in any country to prudently manage pension risk. With its immediate
relevance to U.S., Canadian and Dutch pension funds, this important transaction
represents a watershed moment in a pension de-risking trend that is expanding
globally.
The global pension risk transfer market has exceeded $200
billion since 2007 and is experiencing significant growth in the key markets of
the U.S., UK, Canada and the Netherlands.
There are over 30 examples of transactions in excess of $1
billion for leading companies like General Motors, Verizon, Rolls Royce, BMW,
British Airways, Akzo Nobel and Aviva. These companies have moved to de-risk
their pension plans ahead of the growing trend. Many more are preparing to
transact soon in the US and abroad to take advantage of favorable market
conditions for risk transfer.
Those that act gain a competitive advantage in their
industry peer groups and increase the pressure on companies that have yet to
reduce pension risk.
Each of the major transactions completed to date has been
tailored to meet the specific needs of the pension plan and its sponsor.
The drive to customize has been crucial to the development
of the market because no two companies are the same and no two have the same
goals, resources, constraints or definitions of success. Until recently, the
role of innovation was to create the basic building blocks for transactions.
Strategies were developed to allow pension funds to transfer all asset and
liability risks through a buy-in or buy-out.
Alternatives were created to allow the transfer of longevity
risk alone or the flexibility to pay for de-risking over time. Innovation has
been accelerated by measured increases in longevity and asset losses during the
financial crisis. Since 2011, the focus has shifted to innovations that allow
the largest transactions (such as BTPS, GM and Verizon) to succeed and
innovations that give U.S., Canadian and Dutch pension plans a flexible menu of
de-risking solutions from which to choose.
Growing U.S. market
The GM and Verizon buy-out transactions in 2012 opened a new
era in the U.S. market. Since then, new pensioner mortality tables in the U.S.
show that the average 65-year-old pensioner is likely to live two years longer
than expected just ten years ago.
The new mortality tables will increase GAAP liabilities,
decrease shareholder value and create a cash call for corporate plan sponsors
as funding requirements rise to meet the reality of increasing longevity. Insurance solutions, (including buy-out,
buy-in and longevity insurance) remain the only effective means of managing
longevity risk for pension funds and many more U.S. companies will transact in
order to shed the risk, cost and volatility of maintaining pension exposure.
While BTPS, GM and Verizon are the largest transactions
completed to date, leading companies around the world will continue to use
insurance solutions to manage pension risks.
As this trend accelerates globally, spurred by the
long-awaited recovery of the financial markets and an increasing awareness of
longevity risk, another $250 billion in transaction volume is likely.
These transactions will build on the foundation of the pension
risk transfer market that we can see so clearly today and will create
retirement security for plan participants and a lower risk future for pension
plan sponsors.
Source: Employee
Benefit News
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