Leading global professional services company Towers
Watson has launched a new service enabling pension schemes to
gain direct access to the reinsurance market in order to hedge
longevity risk for their defined benefit liabilities.
Based in Guernsey, Towers Watson Longevity Direct allows pension
schemes to own a ready-made insurance cell that can write insurance
and reinsurance contracts for longevity swap transactions. The
structure significantly reduces the cost of hedging longevity risk
for pension schemes by removing the need for an intermediary
insurer to write the transaction. It also means bigger transactions
can be completed and the best reinsurance pricing can be
accessed. Willis Guernsey is managing the Incorporated
Cell Company (ICC) for Towers Watson and Appleby is
providing the legal services.
Keith Ashton, UK Head of Risk Solutions at Towers Watson, said:
"Access to the reinsurance market has become increasingly
expensive and inefficient in recent years, but the appetite from
defined benefit pension schemes to hedge their longevity risk has
been growing strongly. Traditional intermediary costs can be
several times higher than accessing the market directly and the aim
of Longevity Direct is to provide more affordable and efficient
access to the market.
"This structure also means the pension scheme can take
advantage of the best possible reinsurer pricing, rather than
having to compromise on pricing due to the intermediary's
exposure limits. We find that pension scheme and reinsurer
interests are typically very aligned; a direct agreement can be
much less complex than the longevity swaps we have seen in the
past. For these reasons we're confident that the
opportunity to access the reinsurance market directly is one that
will appeal to a range of pension schemes who have previously held
back. We already have a number of our clients which are
progressing longevity hedging through this structure."
According to Towers Watson pensions-derisking transactions, such
as longevity swaps, have grown consistently in volume and value in
recent years. In 2014, £32 billion worth of transactions have
been completed, double the previous year's total, in large part
due to BT Pension Scheme's £16 billion transaction in
June which was the largest deal of its kind.
Longevity Direct is ideally suited to longevity-hedging
transactions where a single reinsurer can take on the whole
liability, covering between £1 billion and £3 billion
of liabilities. The greater simplicity of the cell structure means
that transactions can be completed in a much shorter space of time,
further reducing the set-up costs for pension schemes.
Mr Ashton added: "The pensions-derisking market, in
particular longevity-hedging deals, is set to continue growing next
year. While we may not see mega-deals like the BT Pension Scheme
deal, the efficiency, affordability and relative simplicity which
Longevity Direct offers is likely to prove very appealing for many
pension schemes which have been waiting for the right
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