UK: Longevity Risk Sector Picks Up Momentum

Last Updated: 2 June 2010
Article by James Parker, Kirsty Maclean and Mike Munro

In February, Abbey Life, the wholly owned insurance company of Deutsche Bank, announced it had executed the largest-ever longevity insurance transaction, providing BMW (UK) Operations' pension scheme with a hedge for life expectancy risks associated with £3bn pension scheme liabilities relating to 60,000 pensioners.

The BMW transaction follows a year in which the pace of development of the UK longevity risk transfer market has strongly accelerated.

In early 2009, it was announced Abbey Life had concluded transactions with Pacific Life Re and another unnamed reinsurer for the transfer of longevity risks associated with a portfolio of in-payment annuities with underlying liabilities of £1.5bn ($2.25bn).

A number of further longevity only transactions followed through the year and, with further participants entering the market and predictions longevity hedges in respect of a further £10bn to £20bn of scheme liabilities are likely to be concluded in 2010, is longevity risk transfer on the verge of take-off?

Annuities and longevity risk

Longevity risk is a core feature of most classes of annuity business and therefore integral to the risk portfolios of many major life insurers.

Under a typical annuity contract, the insurer agrees to make regular payments to the insured annuitant, and sometimes to other beneficiaries or dependants, until death. If an annuitant lives longer than expected, then the payments made will be greater than expected. If there is a general increase in the life expectancy of a portfolio of annuitants, there will in turn be an overall increase in the insurer's liabilities.

Many life insurers also write protection (or term assurance) business and where that is so their portfolios will already incorporate an embedded, albeit imperfect, hedge against increased longevity.

Regardless of that, understanding and managing mortality, longevity and associated demographic risks is central to most classes of long-term risk and so is at the heart of the business of most life insurers.

Companies, pension schemes and de-risking

Any entity that sponsors or provides a defined benefit (DB) pension scheme is exposed to longevity risks (as well as investment and other risks integral to annuity business).

The liabilities associated with the DB market in the UK alone are vast. While estimates vary to some degree, the total DB exposures of UK pension schemes are generally accepted to be in excess of £1trn.

The associated risks and exposures, whether to asset values, improved longevity or otherwise are similarly significant, and recent years have seen ever greater focus by sponsors, trustees and advisers on the management and mitigation of those risks - and increasing demand for de-risking products and solutions.

Insured buy-outs and buy-ins

Insured "buy-outs", involving the provision of individual annuity policies directly to pensioners in place of their membership of the relevant pension scheme, have been available for many years.

Recently, "buy-in" policies have become more common (sometimes as a stepping stone to full buy-out). While economically similar to a buy-out, a buy-in policy does not alter the relationship between the scheme and trustees and its members, but rather is purchased by the trustees as an asset of the scheme. Common to both, however, is the transfer of scheme assets to the insurer in return for a promise to pay the relevant benefits.

The market began to open up from 2005 with a number of new players emerging. Driven to some degree by attractive pricing conditions, buy-out/buy-in volume peaked between the first and third quarters of 2008 -­ with liabilities of around £8bn transferred. However, the collapse of Lehman Brothers, and the associated effects on asset prices and volatility, adversely affected pricing and significantly suppressed transaction volumes.

Longevity hedges

The buy-out/buy-in market may now be showing signs of recovery (for example, Pension Corporation announcing a buy-in of approximately £500m of liabilities from the Cadbury pension scheme in November 2009).

In the meantime, the demand for cost-effective de-risking solutions remains strong, driving the rapid growth in longevity-only transactions described above. Transaction structures will vary. However, in its basic operation, a longevity hedge (or swap) will typically exhibit features similar to an interest rate swap. In broad terms:

  • The parties agree a schedule of "fixed" payments to be made by (in the case of a pension scheme) the trustee on each payment date during the term of the hedge. The fixed payments (or premium) will be broadly reflective of the parties' best estimate of the aggregate value of benefits payments expected to be made to relevant pensioners (or beneficiaries) on each payment date together with the hedge provider's profit/risk margin;
  • The hedge provider (or insurer) will in turn agree to pay to the trustee the actual amount of benefit payments made to relevant pensioners/beneficiaries on each payment date (floating payments); and
  • The floating and fixed payments at each payment date will be set off against each other, with the difference being payable by the relevant party to the other. So, if the floating payment exceeds the fixed payment, the net amount will be due from the hedge provider/insurer to the trustee.

At the outset, the fixed and floating payments are likely to be essentially identical, therefore a key attraction of a longevity hedge is that there is no initial requirement for any transfer of assets to the hedge provider.

Since each transaction will be tailored to the specific situation, the precise structure and terms of each will vary. Depending on the circumstances and solution (i.e., insurance, derivative, bond and so on) the range of issues the parties and their advisers will need to consider is likely to be extensive.

Some key issues may include:

  • The management and allocation of data risk (particularly in insurance solutions);
  • The management and mitigation of counterparty credit risk and, if appropriate, the development and structuring of collateral and associated security arrangements;
  • The extent to which flexibility can be built into the terms of the hedge to permit or cater for possible further de-risking by the trustees;
  • The obligations of the trustees/scheme in relation to administration and, in particular, as to continued existence checking during the life of the contract; and
  • The circumstances in which the hedge might be subject to early termination – and the consequences/financial implications of termination in differing circumstances.

Looking to the future

Reaction to the growth of longevity-only solutions has been positive. This, it seems, is acknowledged to be a socially useful financial innovation - and demand is likely to remain strong.

How far that demand can be met will ultimately be dependent on the extent to which secondary markets for longevity risk develop.

The BMW transaction was the first longevity hedge to be syndicated into the reinsurance market, with the announcements accompanying it making clear the availability and use of reinsurance capacity was integral to the overall deal.

However, while reinsurers plainly have a significant role to play, there is appreciation that reinsurance market capacity alone is unlikely to be sufficient to cater for anticipated volumes. Clearly, the capital markets will need to play a substantial role.

Reflecting that, the formation of a new trade body (the Life and Longevity Markets Association) was recently announced with the objective of promoting a liquid traded market in longevity and mortality related risk – the founder members being Axa, Deutsche Bank, Legal & General, Pension Corporation, Prudential, JP Morgan, Royal Bank of Scotland and Swiss Re.

The desire and commitment, it seems, is there. Longevity risk may, indeed, be the next big thing.

This article first appeared in Insurance Day on 12 March 2010.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.